Payout And Investment Decisions Under Managerial Discretion

In traditional signalling models, high-quality firms can separate themselves from low-quality firms by using their payout policy. Standard agency theory suggests that shareholders will pressure managers to pay out all excess cash in order to avoid over-investment. If firms have different investment opportunities, and these investment opportunities are imperfectly known to investors, signalling µa la Miller and Rock (1985) does not work. Moreover, since the actual amount of excess cash is difficult to determine, attempting to induce management to disburse cash can leave the firm with either too much or too little cash available for investment.