Financing Payouts

Over 40% of firms that make payouts also raise capital during the same year, resulting in 31% of aggregate share repurchases and dividends being externally financed, primarily with debt. Most externally financed payouts are the result of firms persistently setting payouts above free cash flow. The management of leverage and cash for tax optimization purposes is a key—but not the only—driver of payout-financing behavior. Debt-financed payouts are associated with increased firm financial fragility during the COVID-19 and other crises—but internally funded payouts are not. Our results highlight the need to view payout policy through the wider lens of capital structure.