We examine whether Walter’s model holds in that firms with greater growth opportunities would pay out less, using operating cash-flow-based payout measures that include only dividends, only repurchases or both. Two groups of explanatory variables are considered. The first group consists of firm characteristics (including contemporaneous and lagged P/E ratios to control for dividend growth model prediction), and the second group comprises macroeconomic indicators reflecting economic conditions. Across Fixed effects (within) estimator with clustered standard errors, Random Forest, Lasso and Ridge methodologies, the cash-flow-based payout ratios consistently and significantly show contemporaneous association with growth opportunities, providing some support for Walter’s model.
Krishnan et al. (Tue,) studied this question.