Understanding the Puzzle of Corporate Payout Policies: New Perspectives From the Covid-19 Crisis

Abstract

This paper examines the impact on corporate payout policies from the Covid-19 crisis using panel data of publicly listed firms in the G7 countries from 2015 to 2022. The paper delves into the mech-anisms of dividend smoothing and reluctance to reduce dividends as compared to the flexible dynam-ics of share repurchases. Moreover, it seeks to uncover whether dividend smoothing prevails under times of high financial distress. Finally, the study evaluates uncertainty as a predictor of payouts and investigates the heterogeneous impact of Covid-19 on distinct sectors and firm types in relation to their respective payout responses.

Key findings reveal that both payout types were negatively influenced by the pandemic, with share repurchases experiencing a more notable impact. The study also found that firms were more likely to omit rather than reduce both payout types during the pandemic, contradicting traditional principles of dividend smoothing. Uncertainty emerged as a negative predictor for both types of pay-outs, countering prevalent theories but aligning with agency theory predictions. The pandemic's het-erogenous impact across high-technology versus non-technology sectors did not decisively reflect in payout responses, however, firm-level growth emerged as a more accurate determinant. Specifically, the paper finds that growth firms significantly reduced their payouts compared to non-growth firms during the crisis. Overall, this study contributes to academic literature by underscoring agency cost life-cycle theory as a primary determinant of corporate payouts during financial distress, such as the Covid-19 crisis, while it calls into question the role of signaling effects and investor sentiment as primary determinants of corporate payouts.