Corporate payout smoothing: A variance decomposition approach

•Firms smooth their payouts.•Payout smoothing increases with the firm size.•Payout smoothing has increased over time.•Persistent income shocks reduce payout smoothing.

In this paper, we apply a variance decomposition methodology to quantify the smoothness of corporate payouts. We find that firms use debt and investment to smooth a large fraction of shocks to net income to keep payouts less variable. Specifically, our empirical results show that firms keep the growth of payouts relatively small and stable over time. Furthermore, our findings support theoretical work that demonstrates that the dynamics of investment and debt policy should be jointly modeled with payout policy.