Imposed Discipline of Payout Policy leads to Bankruptcy: The Deep Lack of Trust Conjecture

Safieddine Bouali

Abstract


Recent accounting scandals, frauds and wasted earnings by managers (executive jets, ostentatious parties…) spread a deep lack of trust in their relationship with stockholders or bondholders. Ownership is pushed to impose a strong discipline of payout mechanism extracting the free cash flows (FCF) from the manager hands. The financial governance arrangement should expel residual earnings in dividends or share repurchases. Accumulation of FCF and postponing payments should also imply a strong extra-dividend as a punishment to executives when they dont respect the discipline of payout policy. The dynamical model of a corporation selecting a nonlinear payout mechanism triggering strong disbursements of FCF is defined. Numerical computations show severe losses and dynamic turbulence. Paradoxically, automated disciplining payout policy injects bankruptcy risks in a deterministic model of firm without any stochastic leverage.


Full Text: PDF

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

Copyright © Canadian Center of Science and Education

To make sure that you can receive messages from us, please add the 'ccsenet.org' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.