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One-Time Cash Flow Announcements and Free Cash-Flow Theory: Share Repurchases and Special Dividends

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Author Info
 Howe, Keith M
He, Jia
Kao, G Wenchi
Abstract

The leading explanation for the positive price response surrounding tender offer share repurchase and specially designated dividend (SDD) announcements is the information signaling hypothesis. This paper reexamines these announcements to determine if Jensen's free cash-flow theory also has explanatory power. Lang and Litzenberger's (1989) findings suggest an important role for the free cash-flow theory in explaining the market's reaction to dividend changes. In contrast, they find the market's reaction to share repurchases and SDDs is approximately the same for both high-Q and low-Q firms. They thus have an empirical puzzle: If Jensen's free cash-flow theory applies to dividend changes, it is difficult to see why it does not also apply to the analogous events examined here. Copyright 1992 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 47 (1992)
Issue (Month): 5 (December)
Pages: 1963-75
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Handle: RePEc:bla:jfinan:v:47:y:1992:i:5:p:1963-75

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  1. Michael Firth & T. Y. Leung & Oliver M. Rui, 2008. "Double Signals or Single Signal? An Investigation of Insider Trading Around Share Repurchases," Working Papers 222008, Hong Kong Institute for Monetary Research. [Downloadable!]
  2. Luís Krug Pacheco & Clara Raposo, 2009. "On The Timing Of Initial Stock Repurchases," Documentos de Trabalho em Gestão (Working Papers in Management) 06, Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto). [Downloadable!]
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