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November 02, 2012
Paper Co-Authored by Brattle Principal Stewart Myers on Dynamic Agency Payout Model Published in The Journal of Finance

Brattle principal Stewart Myers has co-authored a paper that presents a theory of payout by mature public corporations in a dynamic agency setting. “A Lintner Model of Payout and Managerial Rents” was co-authored by Bart Lambrecht and has been published in the October 2012 issue of The Journal of Finance. In the paper, the authors develop a dynamic agency model in which payout, investment, and financing decisions are made by managers who attempt to maximize the rents they take from the firm, subject to a capital market constraint. The theory’s total payout follows Lintner’s (1956) target adjustment model. The paper aims to explain dividend smoothing and to determine whether Lintner’s model can be derived from deeper principles; however, the authors find that the net total payout, not cash dividends, is what matters in an agency model of payout. The paper also examines how investment policy affects debt policy and payout policy. The authors contend that managers’ risk aversion leads to underinvestment. Once payout and investment policies are set, changes in debt must serve as the shock absorber. The residual cash flow, therefore, is not payout, but rather changes in borrowing. The authors conclude that payout smooths transitory shocks to current income and adjusts gradually to changes in permanent income. Smoothing is accomplished by borrowing or lending. In addition, payout is not cut back to finance capital investment. The paper also finds that risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.