• 7. Towards a Payout Policy

    By now, we have discussed the most important elements surrounding the questions of how much firms should pay out and how they should return money to their shareholders. The purpose of this section is to consolidate the main takeaways and to present a structured approach for managers to think through the payout decision:

    1. Funding needs: Does the firm have excess cash?
    2. Costs of excess cash: If yes: are there any adverse effects to keeping excess cash inside the firm?
    3. Distribution: If yes: How should that cash be returned to shareholders?

     

    The discussion highlights once again that the payout policy cannot be considered in isolation. It is an integral part of the firms broader financial policy and thereby strongly interplays with the investment policy as well as the financing policy. We conclude the section with some thoughts about the relevance of these policies for different types of firms.

6. Why do Firms Pay Dividends?