of new debt issues) during the period, this cash surplus
appears as an increase in the cash balance. A percentage
greaterthan 100 percentindicatesthatthefirmispayingout
morein dividendsthanithasavailableincashflow.These
firmshavetofinancethesedividendpaymentseitheroutof
existing cash balances or by making new stock and debt
issues.
Why Firms May Pay Out Less Than Is Available
Many firms pay out less to stockholders, in the form of
dividendsand stock buybacks, than theyhaveavailable in
freecashflowstoequity.Thereasonsvaryfromfirmtofirm
and we list five possibilities here.
1.Desireforstability.Aswenotedearlier,firmsaregenerally
reluctanttochangedividends;anddividendsareconsidered
sticky because the variability in dividends is significantly
lower than the variability in earnings or cash flows. The
unwillingnesstochangedividendsisaccentuatedwhenfirms
have to reduce dividends, and, empirically, increases in
dividends outnumber cuts in dividends by at least a
five-to-onemargininmostperiods.Asaconsequenceofthis
reluctancetocutdividends,firmswilloftenrefusetoincrease
dividendsevenwhenearningsandFCFEgoup,becausethey
areuncertain abouttheircapacity to maintain thesehigher
dividends.Thisleadstoalagbetweenearningsincreasesand
dividend increases.
2.Futureinvestmentneeds.Afirmmightholdbackonpaying
itsentireFCFEasdividendsifitexpectssubstantialincreases
in capital expenditure needs in the future. Since issuing
securities isexpensive(from aflotationcost standpoint),it