Financing Payouts

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 with simultaneous payouts and security issues do not generate enough operating cash flow to fund both their investment and payouts without the proceeds of these issues. Firms devote more external capital to finance their share repurchases than to avoid regular dividend cuts. Debt is the main source of capital used to externally finance payouts, particularly when credit market conditions are favorable. Firms’ desire to jointly manage their capital structure and liquidity policies—for tax or agency reasons—appears to be a key driver of their decision to simultaneously raise and pay out capital.