Abstract

We reconcile two competing views regarding the relation between corporate governance and payout policy by uncovering the moderating roles of under- and over-investment risk. Our empirical evidence indicates that corporate governance and payout propensity exhibit a negative association (substitute) for firms with a high level of under-investment risk. This association turns positive (complement) for firms with a higher level of over-investment risk. These findings are robust to several checks, including alternative governance measures and exogenous shocks to the quality of corporate governance. Lastly, we observe a similar phenomenon on share repurchase, total payout, and the level of payout.