Working Paper: CEPR ID: DP16199
Authors: Shiqi Chen; Bart Lambrecht
Abstract: We explore whether theoretically the target leverage and pecking order models can be reconciled with payout smoothing.Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment towards the NDR target facilitates payout smoothing.Under strict pecking order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout.
Keywords: payout smoothing; capital structure; pecking order model; leverage target
JEL Codes: G35; G32; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive NDR (Y40) | Increased investment (E22) |
| Negative NDR (Y70) | Disinvestment (L33) |
| Payout target + NDR target (G35) | Payout smoothing (G35) |
| Investment (G31) | Shock absorber (Y60) |
| Negative NDR (Y70) | Stronger negative relation between debt and net income (G32) |
| Very negative NDR target (H68) | Less plausible payout levels (G35) |