Growth, governance and corporate payout policy

We show that when growth opportunities decreased following the end of the Cold War, defence firms responded by increasing total payout. This change in policy was largely driven by increased stock buybacks as opposed to changes in cash dividends and primarily by firms that faced stronger external governance. On the other hand, firms with weaker internal governance that were more severely affected by the reduced growth chose to alter the mix of payout at the expense of repurchases. Overall, our findings (i) demonstrate a causal link where exogenous shocks to growth cause payout policy changes, (ii) support the role of internal governance in payout policy design where entrenched managers pre-commit to higher dividends and (iii) emphasize the monitoring role of external governance in mitigating agency costs of free cash flow.