Chapter 10

Payout Policy*

Avner Kalay

Michael Lemmon    University of Utah, David Eccles School of Business


This chapter provides a survey of payout policy—the return of capital by firms to their equity investors through dividends and share repurchases. The modern study of payout policy is rooted in the irrelevance propositions developed by Nobel Laureates Merton Miller and Franco Modigliani. Payout policy is irrelevant when capital markets are perfect, when there is no asymmetric information, and when the firm’s investment policy is fixed. Relaxing these assumptions leads to a role for payout policy to control agency problems and convey information to investors. Although changes in dividend policy are associated with changes in firm value, ...

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