Why are aggregate equity payouts pro-cyclical?

Huang-Meier, Winifred, Freeman, Mark C. and Mazouz, Khelifa ORCID: https://orcid.org/0000-0001-6711-1715 2015. Why are aggregate equity payouts pro-cyclical? Journal of Macroeconomics 44 , pp. 98-108. 10.1016/j.jmacro.2015.01.005

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Abstract

Our study uses two dynamic stochastic general equilibrium models to explain why external changes in the economic environment result in businesses systematically implementing pro-cyclical equity payout policies. More importantly, this work provides an alternative resolution to examine the cyclicality of payouts that many previous studies have found anomalous. • Both models endogenize low elasticity of investment. • The first model follows the agency conflict literature by assuming that risk-averse managers maximize their own objective function in preference to the share price of the firm. Risk-averse managers dislike taking on risky projects and may reject potentially profitable reinvestment opportunities. This results in greater payouts in benign economic conditions. • The second model includes capital adjustment costs within an economy without agency conflicts. These frictions also inhibit managers from heavily re-investing in a pro-cyclical manner, and the resultant payout policy moves in line with the economy. • Our results suggest that the first model better explains the payout pro-cyclicality anomaly than the second model. Our study highlights the role that agency conflicts can play in real business cycle models.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Uncontrolled Keywords:	dynamic stochastic general equilibrium economies; payout policy; business fluctuations; firm objectives; capital adjustment costs
Publisher:	Elsevier
ISSN:	0164-0704
Date of First Compliant Deposit:	30 March 2016
Date of Acceptance:	20 January 2015
Last Modified:	16 Nov 2023 08:58
URI:	https://orca.cardiff.ac.uk/id/eprint/70868

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