XXVI Edition

14-15-16 December 2017"

The Impact of Financial Markets on Payout Policy: Evidence from Short Selling

Francis Bill Francis, Rensselaer Polytechnic Institute
Samuel Gilna, Lally School of Management - Rensselaer Polytechnic Institute
Wu Qiang, Lally School of Management - Rensselaer Polytechnic Institute

This paper investigates the impact of the stock-price formation process on payout policy. The SEC Regulation SHO pilot program removed short-sale constraints and increased the prospect of short selling for one-third of the Russell 3000 firms. We find that these firms are more likely to pay dividends during the pilot program and continue to pay after the program ends. We find that no significant increase in the propensity to repurchase shares during pilot program. However, after the program ends the propensity to repurchase shares increases. We show that firms use payouts to signal and reduce agency conflicts. These findings support signaling and agency-based payout models. Moreover, we demonstrate that payout smoothing is reduced and dividends are more likely to be financed through debt when the prospect of short selling increases. Overall, this study shows that frictions within financial markets have a significant impact on payout policy.

Area: Financial Stability

Keywords: dividends, repurchases, short selling, Regulation SHO, signaling, smoothing

Paper file

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