The Value of Financial Flexibility and Payout Policy

Marc Steffen Rapp, Thomas Schmid, Daniel Ludwig Urban
2012 Social Science Research Network  
We propose a novel empirical measure for a firm's value of financial flexibility and examine its impact on payout decisions. Studying listed firms from 23 countries over the 1998-2008 period, we find convincing evidence that the value of financial flexibility is an important determinant of payout policy. Specifically, firms with a high value of financial flexibility tend to limit or even avoid payouts. If such firms decide to disgorge cash, they prefer share repurchases to dividends. Overall,
more » ... vidends. Overall, our results are consistent with the view that financial flexibility considerations determine the pecking order of payouts. JEL classification: G32, G35
doi:10.2139/ssrn.2081596 fatcat:q6baqgsvnvhujftopbi3v4j24e