Dynamic corporate payout smoothing: A structural vector autoregressive model

We utilize a structural vector autoregressive (SVAR) model and a variance decomposition methodology to augment the existing cross-sectional studies on corporate payout smoothing. Initially, we incorporate the net income shocks within a multi-equation framework using panel data, thus capturing the dynamic interplay between volatility in net income and various smoothing mechanisms, specifically debt and investments. Subsequently, under dynamic models and diverse structural shocks, we employ impulse response functions to elucidate the interdependencies of smoothing channels over time. Our model is implemented on a sample of organizations operating within U.S. financial markets. We compare our findings with predictions from cross-sectional corporate payout smoothing, offering robust empirical evidence of the dynamic interaction between debt and investments as smoothing channels within the context of the net income–payout variance relationship. • Net income shocks are predominantly permanent and are partially absorbed by the payout. • The debt smoothing channel significantly absorbs net income shocks. • In response to shocks, investments and debt smoothing channels exhibit substitution effects.