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Annual Review of Financial Economics

Volume 13, 2021

Do Capital Structure Models Square with the Dynamics of Payout?

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.

Keyword(s): capital structure, investment, JEL G11, JEL G32, JEL G35, leverage target, payout smoothing, pecking-order model
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/content/journals/10.1146/annurev-financial-010421-085556
2021-11-01
2024-04-24
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