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A Lintner Model of Payout and Managerial Rents

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>10/2012
<mark>Journal</mark>Journal of Finance
Issue number5
Number of pages50
Pages (from-to)1761-1810
Publication StatusPublished
Early online date12/09/12
<mark>Original language</mark>English


We 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. Managers smooth payout to smooth their flow of rents. Total payout (dividends plus net repurchases) follows Lintner’s (1956) target adjustment model. Payout smooths out transitory shocks to current income and adjusts gradually to changes in permanent income. Smoothing is accomplished by borrowing or lending. Payout is not cut back to finance capital investment. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.