Do Capital Structure Models Square with the Dynamics of Payout?

Shiqi Chen () and Bart M. Lambrecht ()
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Shiqi Chen: Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom
Bart M. Lambrecht: Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom

Annual Review of Financial Economics, 2021, vol. 13, issue 1, 271-299

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 toward 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; investment (search for similar items in EconPapers)
JEL-codes: G11 G32 G35 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1146/annurev-financial-010421-085556

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