A Litner Model of Payout and Managerial Rents

Bart M. Lambrecht and Stewart C. Myers

No 16210, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G3 (search for similar items in EconPapers)
Date: 2010-07
Note: CF
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