Corporate Payouts Under Economic Policy Uncertainty

Using a sample of all public firms in the U.S. between 1985 and 2019, I examine whether general economic policy uncertainty, monetary policy uncertainty, and fiscal policy uncertainty have heterogeneous effects on corporate payouts; mainly dividends and open market share repurchases. I find a consistent negative relation between share repurchases and EPU, and the effect seems to be more pronounced under fiscal policy uncertainties as appose to monetary policy uncertainties. Finally, the negative relation is mainly driven by capital constrained firms. Taken together, the findings suggest that withholding funds is more valuable than dispersing cash to investors to mitigate agency costs of free cash flows, at least in the United States. This empirical test relies on the economic policy uncertainty (EPU) index and its subcategories developed by Baker et al., 2016.