I investigate the effects of firms' proportion of fixed and variable costs on their payout policy and find that firms with higher fixed costs have significantly higher volatility in their future cash flows and more variable future operating incomes. These firms pay a lower fraction of their operating income in dividends and share repurchases. Finally, these firms return higher fractions of their payouts via share repurchases because this method offers greater flexibility. The results are robust to several alternate specifications and firm-level controls, and show that firms' cost structures play a significant role in payout policy choices.In 2007, US public firms paid their shareholders more than $767 billion in dividends and share repurchases (Farre-Mensa, Michaely, and Schmalz, 2014). These two payout methods are the most common (Allen and Michaely, 2003), and the choice between them remains an important financial decision for managers (Brav et al., 2005). Many factors affect the payout method chosen, such as taxes, agency issues, signaling, maturity, and catering. 1 I examine a previously unexplored link to this choice-the operating cost structure.Fixed costs do not change by units of output but variable costs do. If the sales of a firm having high fixed costs suddenly decline, its operating expenses cannot be easily reduced. Firms with high variable costs, in contrast, can quickly adapt their operating expenses to changing sales. This lack of flexibility in cost structure makes it more difficult for firms with high fixed costs to commit to a steady payout, whereas firms with high variable costs are more comfortable taking on commitments of steady payout that they can consistently pay even when sales change. Jagannathan, Stephens, and Weisbach (2000) find that the sources of income (operating vs. nonoperating) drive payout choices, and Guay and Harford (2000) find that the level of permanence in cash-flow shocks affect payout choices. I hypothesize that a firm's cost structure, which may be related to production technology, input costs, product mix, and so on, also affects its payout policy. Although the research has linked variability in, and sources of, cash flows to payout policy choices, studying firms' operating cost structure might address some of the causes of the observed variation in the cash flows.Using a sample of US firms from 1987 to 2014 in the COMPUSTAT database, I compute a firm's cost structure. Following Kahl, Lunn, and Nilsson (2012), I define a firm's cost structure as the sensitivity of changes in operating expenses to changes in sales. The firms with higher sensitivity are those that can change their operating costs drastically as their sales change. Hence, firms with high values of cost structure are those that tend to have a low fraction of their operating I thank Sudip