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Repurchase Premia as a Reason for Dividends: A Dynamic Model of Corporate Payout Policies

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Author Info
Chowdhry, Bhagwan
Nanda, Vikram
Abstract

We propose that it is precisely because firms' repurchases of their own stock through tender offers are associated with large stock-price increases that repurchases are unattractive as a means of distributing cash. As a result, firms distribute some cash in the form of dividends--despite the tax disadvantage--and carry the rest to future periods. However, when their stock is sufficiently undervalued, firms distribute all accumulated cash through stock repurchases. We show that dividends are smoothed and are positively related both to earnings innovations and to previous period's dividends. Also, the stock-price reaction to a repurchase announcement, of a given size, is increasing in the previous period's dividends. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 7 (1994)
Issue (Month): 2 ()
Pages: 321-50
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Handle: RePEc:oup:rfinst:v:7:y:1994:i:2:p:321-50

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  1. Alon Brav & John R. Graham & Campbell R. Harvey & Roni Michaely, 2003. "Payout Policy in the 21st Century," NBER Working Papers 9657, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Franklin Allen & Antonio Bernardo & Ivo Welch, . "A Theory of Dividends Based on Tax Clienteles," Rodney L. White Center for Financial Research Working Papers 15-98, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
    Other versions:
  3. George W. Fenn & Nellie Liang, 1997. "Good news and bad news about share repurchases," Finance and Economics Discussion Series 1998-04, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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This page was last updated on 2009-11-28.

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