Financing Payouts

Abstract

We study the extent to which firms rely on the capital markets to fund their payouts. We find that 42% of firms that pay out capital also initiate debt or equity issues in the same year, resulting in 32% of aggregate payouts being externally financed. Most firms that simultaneously raise and distribute capital do not generate enough free cash flow to fund their payouts internally. Firms devote more external capital to finance share repurchases than to avoid dividend cuts. Payouts financed by debt, which allow firms to jointly manage their capital structure and liquidity, are by far the most common