Do Actions Speak Louder Than Words? The Relation Between Payouts and Guidance Since 2000
Prof. Douglas J. Skinner
Sidney Davidson Distinguished Service Professor of Accounting
The University of Chicago Booth School of Business
We provide evidence that corporate managers’ payout and guidance decisions are connected, a topic largely unaddressed by extant literature. We argue that managers use payouts in conjunction with guidance to convey their expectations about firm profitability. To investigate this, we provide evidence on the payout policies and guidance practices of U.S. non-financial firms since 2000. Using a variety of tests, we consistently find that payouts – especially ongoing payouts (dividends and regular repurchases) – are related to guidance; not only do payers issue more guidance, the relation is stronger for firms with ongoing payouts. Overall, our evidence supports the view that managers use payouts in conjunction with guidance to credibly convey their views about future profitability, which helps justify investment spending and mitigate investor concerns about capital allocation (agency costs of free cash flow).
