PAYOUT POLICY DURING MARKET-WIDE FINANCIAL CONSTRAINTS: EVIDENCE FROM THE COVID-19 DOWNTURN

Abstract

Share repurchases are perceived as a flexible payout mechanism as it distributes free cash flow while mitigating the risk of underinvestment. It may be simpler to stop or trim share repurchases than dividend payments. We test the flexibility hypothesis of share repurchases using the Covid-19 economic crisis as a natural experiment where firms encounter a sudden cash-flow uncertainty. We employ a balanced panel of S&P 1500 firms from the period 2014 to 2021. Our results are consistent with the view that share repurchases offer more flexibility than dividends. Firms are likely to reduce share repurchases when they are cash constrained but still maintain dividend payouts. However, firms are also likely to trim dividends if the financial constraints persist.