The Value of Financial Flexibility and Payout Policy

2012 ◽  
Author(s):  
Daniel Ludwig Urban ◽  
Marc Steffen Rapp ◽  
Thomas Schmid
Keyword(s):  
Payout Policy ◽  
Financial Flexibility

The Value of Financial Flexibility and Payout Policy

2012 ◽  
Author(s):  
Marc Steffen Rapp ◽  
Thomas Schmid ◽  
Daniel Ludwig Urban
Keyword(s):  
Payout Policy ◽  
Financial Flexibility

Payout Policy Trade-Offs and the Rise of 10b5-1 Preset Repurchase Plans

2020 ◽  
Vol 66 (6) ◽  
pp. 2762-2786 ◽  
Author(s):  
Alice Bonaimé ◽  
Jarrad Harford ◽  
David Moore
Keyword(s):  
Insider Trading ◽  
Payout Policy ◽  
Open Market ◽  
Firm Level ◽  
Financial Flexibility ◽  
Market Reactions ◽  
Company Stock ◽  
Trade Offs ◽  
Repurchase Announcements ◽  
Buy Back

We are the first to document and study the use of Rule 10b5-1 preset repurchase plans. Though the rule’s original intent was to clarify conditions for enforcing insider trading laws, generally thought to apply to individuals classified as firm insiders, we find strong use of the rule at the firm level to repurchase company stock. We exploit this new and widespread form of payout to examine an issue at the core of payout decisions—the trade-off between commitment and financial flexibility. Relative to open market repurchases, preset plans provide an expanded repurchase window and increased legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption: Firms with alternative sources of financial flexibility are more likely to precommit to a repurchase plan, as are firms with a history of poor repurchase timing and firms constrained by blackout windows. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates, with more positive market reactions, and with more dividend substitution than open market repurchases. Lastly, we find that preset repurchase plans represent a unique payout tool whose introduction encouraged a different set of firms to buy back stock and significantly altered the payout landscape. This paper was accepted by David Simchi-Levi, Editor-in-Chief.

The Effect of Financial Flexibility on Payout Policy

2018 ◽  
Vol 55 (1) ◽  
pp. 263-289
Author(s):  
Anil Kumar ◽  
Carles Vergara-Alert
Keyword(s):  
Causal Effect ◽  
Sharp Decrease ◽  
Payout Policy ◽  
Share Repurchases ◽  
Standard Deviation Increase ◽  
Financial Flexibility ◽  
Exogenous Shocks ◽  
Investment Opportunities ◽  
Debt Capacity ◽  
Real Estate Prices

We use variation in real estate prices as exogenous shocks to firms’ debt capacity to study the causal effect of financial flexibility on payout policy. We show that an increase in financial flexibility results in higher dividends, share repurchases, and payout flexibility. We find that a 1-standard-deviation increase in a firms’ collateral value results in 0.26- and 0.55-percentage-point increases in nondiscretionary and discretionary payouts, respectively. This effect is stronger for firms with few investment opportunities. Moreover, highly leveraged firms are more likely to cut dividends in response to a sharp decrease in their financial flexibility.

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