Corporate Payout, Cash Retention, and the Supply of Credit: Evidence from the 2008-09 Credit Crisis
45 Pages Posted: 23 Apr 2013
Date Written: April 22, 2013
Abstract
Using the financial crisis as a natural experiment, we analyze the extent to which firms adjust financial policies on the margin in response to a credit supply shock. We document significant reductions in corporate payouts – both dividends and (to a larger extent) share repurchases - during the 2008-2009 financial crisis. Payout reductions are more likely in firms with higher leverage, more valuable growth options, and lower cash balances – i.e., those more susceptible to the negative consequences of a credit supply shock. Moreover, firms appear to use the proceeds from the reduction in payout to maintain cash levels and to fund investment. These findings are consistent with the view that an exogenous shock to the supply of credit during the financial crisis increased the marginal benefit of cash retention, leading some firms to turn to payout reductions as a substitute form of financing.
Keywords: Cash, Corporate investment, Payout policy, Crisis, Financing constraints
JEL Classification: G01, G31, G35
Suggested Citation: Suggested Citation
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