Payout Policy Pedagogy: What Matters and Why

"This paper argues that we should abandon""MM (1961)""irrelevance as the foundation for teaching payout policy, and instead emphasise the need to distribute the full value generated by investment policy ('full payout'). Because MM's assumptions restrict payouts to an optimum, their irrelevance theorem does not provide the appropriate prescription for managerial behaviour. A simple example clarifies why the correct prescription is 'full payout', and why both payout and investment policy matter even absent agency costs (""DeAngelo and DeAngelo, 2006""). A simple life-cycle generalisation explains the main stylised facts about the payout policies of US and European firms." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.