Wednesday, October 24, 2012

A Servant to Many Masters: Competing Shareholder Preferences and Limits to Catering

MANCONI Alberto, MASSA Massimo
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Journal of Financial and Quantitative Analysis 43, 6 (2013) 1693-1716

We study the cross-sectional differences in the way firms comply with their shareholders’ desired payout policies, and the implications of different degrees of compliance on corporate policies. We create an index of payout compliance that gauges how much a firm diverges from its investors’ desired payout policy. We argue that compliance is driven by fragmentation in the payout preferences of the investors. This has implications on both firm value and the policies a firm pursues. Firms that comply more are better perceived by the market. More compliant firms experience a lower stock price drop when they access the market to refinance themselves, and a more positive market reaction to dividend announcements. Furthermore, investors react to a change in compliance by increasing their investment in the firms that comply more. A cheaper access to the equity market allows more compliant firms to invest more and lever less. Indeed, the (in)ability to comply constitutes a financial constraint: more compliant firms are less levered and invest more both directly, through capital expenditure, and indirectly, through acquisitions.