Payouts smoothing and income growth

Abstract

We quantify the extent and drivers of payout smoothing by employing 34,966 US firms’ data from 1975 to 2022. We report that payout growth is almost insensitive to year-by-year net income growth, in line with preceding literature suggesting payout smoothing. Novel to the literature, we incorporate the dynamics of payout smoothing, permanent, and aggregate net income growth into the depiction. Though payout growth is mostly immune to annual income growth shocks, it is significantly affected by net income growth of 5- or 10-year periods. Firms also consider the aggregate-sectoral and/or country-level-income growth in payout decisions. Since both permanent and aggregate income growths take over the role of year-by-year income growth, we further investigate if firms’ financial positions impact the magnitude of the smoothing. Annual payout growth depends more on permanent income growth for firms with higher profits and lower leverage positions. Notably, more financially vulnerable firms with higher leverage adjust payouts more in line with aggregate economic conditions.