In our paper, The Shareholder Base and Payout Policy, forthcoming in the Journal of Financial and Quantitative Analysis, we examine the relation between the shareholder base and payout policy. Finance practitioners acknowledge that having a broad shareholder base is an important factor for many corporate decisions. For example, in a recent study of firm payout policy, Brav, Graham, Harvey, and Michaely (2005) survey financial executives and conclude that “With respect to payout policy, the rules of the game include … [to] have a broad and diverse investor base…” Despite the apparent importance of the shareholder base there is little academic evidence relating shareholder base to corporate decisions. In this paper we investigate the effect of the shareholder base on the level and method of payout.

Shareholder base and payout policy of the firm are linked through a firm’s cost of capital. There are at least two reasons to expect that companies with a smaller shareholder base would have a higher cost of capital and, hence, be less flexible in their choice and size of payout. First, having a large shareholder base may reduce asymmetric information between insiders and outsiders through more information production. Second, the shareholder base may be related to the recognition of the firm and hence the availability of external financing. For example, Merton (1987) states that “an increase in the relative size of the firm’s investor base will reduce the firm’s cost of capital and increase the market value of the firm.”

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