Working Paper: NBER ID: w16210
Authors: Bart M. Lambrecht; Stewart C. Myers
Abstract: We develop a dynamic agency model where payout, investment and financing decisions are made by managers who attempt to maximize the rents they take from the firm, subject to a capital market constraint. Managers smooth payout in order to smooth their flow of rents. Total payout (dividends plus net repurchases) follows Lintner's (1956) target-adjustment model. Payout smooths out transitory shocks to current income and adjusts gradually to changes in permanent income. Smoothing is accomplished by borrowing or lending. Payout is not cut back to finance capital investment. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.
Keywords: No keywords provided
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| payout (G35) | managerial rents (D33) |
| managerial rents (D33) | payout (G35) |
| risk aversion (D81) | underinvestment (G31) |
| habit formation (I12) | mitigates underinvestment (G31) |
| payout adjustments (G35) | changes in managers' perceptions of permanent income (D11) |
| debt dynamics (H63) | smoothing behavior of payouts and rents (D15) |
| investment decisions (G11) | payout decisions (G35) |