Corporate Financial Behavior.

• Author: Van Doren, Peter
• Position: Working Papers: A SUMMARY OF RECENT PAPERS THAT MAY BE OF INTEREST TO REGULATION'S READERS.

* "Are Corporate Payouts Abnormally High in the 2000s?" by Kathleen Kahle and Rene M. Stulz. April 2020. NBER #26958.

* "Why Does Equity Capital Flow Out of High Tobin's q Industries?" by Dong Lee, Han Shin, and Rene M. Stulz. February 2020. SSRN#3535841.

Corporate profits and their division between dividends, stock repurchases, and reinvestment are a source of concern for members of Congress from both parties. These two papers look at issues relevant to that concern.

The first paper asks whether payouts (rather than retention of excess cash flow within the firm) are larger now than in the past. The answer appears to be yes. In the 2000s, annual aggregate inflation-adjusted payouts were three times their pre-2000 level and increased as a percentage of assets (2.7% for 1971-1999 versus 4.1% for 2000-2017) and as a percentage of operating income (18.9% for 1971-1999 versus 32.4% for 2000-2017).

The payouts are higher because firms earn more and pay out more of what they earn. Some 38% of the increase in payouts is from higher earnings and 62% from a higher payout rate, which is exclusively from stock repurchase instead of dividends. Dividends average 14.4% of operating income from 1971 to 1999 and 14% from 2000 to 2017. Net stock repurchases averaged 4.8% of operating income before 2000 and 18.3% from 2000 to 2017.

To assess whether the fundamentals that govern corporate financial behavior have changed, the authors estimate a traditional econometric model of payouts with data from 1971-1999 and then use the results to predict current payouts. The model predicts that real aggregate payouts in 2017 should be $784 billion; actual payouts were $734 billion. So, our understanding of current corporate behavior does not require a complete rethinking of...