Behavioral Motives of the Payout Policy Choice: Literature Review

Abstract

The question of the significance of the payout policy in terms of value creation has been in the works for over 50 years now. These endeavors have led to the establishment of some classic theories that explain the different patterns in a company’s payout policy choices such as the signaling theory, the agency costs theory, the clientele theory and the catering theory. However, the results are not always consistent among different authors, which means that these theories cannot be used universally. Results vary widely among different samples and different time periods. The classic theories assume that all agents on the market are fully rational, which is rather unrealistic since an agent’s actions cannot always be explained by financial theories. These two facts led to the development of the behavioral explanation for the payout policy choice. This approach focuses on the behavioral characteristics of managers that are responsible for the decision-making process in the company. Thus, the payout policy, according to this approach, is considered to be a function of the behavioral characteristics of managers (overconfidence, optimism, risk preferences, etc.) rather than a function of the financial variables. The main difficulty here is how to measure the behavior of managers.

This particular article reviews the research that covers the classic and modern theories of payout policy. This article covers the logic of the development of different views on the payout policy. The authors cover articles that test different theories, analyze the main results and conclusions, and investigate the reasons for the development of these theories. The main focus has been on the behavioral approach, which is considered to be the most fruitful direction for future research. The authors also cover the methodology of the existing papers, the variables that measure behavioral characteristics and the results.