The Effect of Financial Flexibility on Payout Policy

Anil Kumar, Carles Vergara-Alert

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We use variation in real estate prices as exogenous shocks to firms' debt capacity to study the causal effect of financial flexibility on payout policy. We show that an increase in financial flexibility results in higher dividends, share repurchases, and payout flexibility. We find that a 1-standard-deviation increase in a firms' collateral value results in 0.26- and 0.55-percentage-point increases in nondiscretionary and discretionary payouts, respectively. This effect is stronger for firms with few investment opportunities. Moreover, highly leveraged firms are more likely to cut dividends in response to a sharp decrease in their financial flexibility.

Original languageEnglish
JournalJournal of Financial and Quantitative Analysis
Pages (from-to)263-289
Number of pages27
Publication statusPublished - 2020


  • Financial flexibility
  • corporate real estate.
  • dividends
  • payout policy
  • share repurchases


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