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Ambiguity, Risk, and Payout Policy

We study the effect of ambiguity — Knightian uncertainty — on payout policy. We find that firm-level ambiguity increases and accelerates payout, via both dividends and share repurchases. This positive effect of ambiguity is distinct from the known negative effect of risk on payout policy. Ambiguity leads ambiguity-averse investors to overweight the likelihoods of bad outcomes and underweight the likelihoods of good outcomes, so the attractiveness of investment opportunities decreases in ambiguity, which may increase investors’ preferences for cash payout. Consistent with this positive effect of ambiguity on payout, we find that dividend initiation announcement returns increase in ambiguity.