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Why are aggregate equity payouts pro-cyclical?

Huang-Meier, Winifred, Freeman, Mark C. and Mazouz, Khelifa 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: 29 Jun 2019 16:01
URI: http://orca.cf.ac.uk/id/eprint/70868

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