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Distributing excess cash: the role of specially designated dividends

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Author Info
Baker, H. Kent (American University)
Mukherjee, Tarun K. (University of New Orleans)
Powell, Gary E. (Towson University)

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Abstract

This study explores why firms distribute excess cash as specially designated dividends (SDDs) instead of using regular dividends or repurchasing shares. We survey top managers of NASDAQ, AMEX, and NYSE firms issuing at least one SDD between 1994 and 2001. The results show that firms tend to pay SDDs when they experience strong earnings and cash flows and want to increase at least temporarily the yield to shareholders. Having strong earnings and cash flows also provide an impetus for regular dividend increases, but paying regular dividends is part of a firm’s standard dividend policy. The primary motives for repurchasing shares are to take advantage of perceived market undervaluation of the firm’s shares and to improve performance measures, especially. Overall, the results lend support to the signaling explanation for the disbursement of excess funds, but not the free cash flow or wealth transfer explanations.

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Publisher Info
Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2004-07.

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Length: 32 pages
Date of creation: 19 Oct 2004
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Handle: RePEc:uno:wpaper:2004-07

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Related research
Keywords: Dividends; Payout policy; Specially designated dividends; Share repurchases;

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Find related papers by JEL classification:
G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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References listed on IDEAS
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  1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  2. Denis, David J, 1990. " Defensive Changes in Corporate Payout Policy: Share Repurchases and Special Dividends," Journal of Finance, American Finance Association, vol. 45(5), pages 1433-56, December. [Downloadable!] (restricted)
  3. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September. [Downloadable!] (restricted)
  4. Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, vol. 53(1), pages 313-333, 02. [Downloadable!] (restricted)
  5. Indudeep S. Chhachhi & Wallace N. Davidson, III, 1997. "A Comparison of the Market Reaction to Specially Designated Dividends and Tender Offer Stock Repurchases," Financial Management, Financial Management Association, vol. 26(3), Fall.
  6. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 2000. "Special dividends and the evolution of dividend signaling," Journal of Financial Economics, Elsevier, vol. 57(3), pages 309-354, September. [Downloadable!] (restricted)
  7. Baker, H. Kent & Powell, Gary E. & Veit, E. Theodore, 2003. "Why companies use open-market repurchases: A managerial perspective," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 483-504. [Downloadable!] (restricted)
  8. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208. [Downloadable!] (restricted)
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  9. Baker, H Kent & Veit, E Theodore & Powell, Gary E, 2001. "Factors Influencing Dividend Policy Decisions of NASDAQ Firms," The Financial Review, Eastern Finance Association, vol. 36(3), pages 19-37, August.
  10. Trahan, Emery A. & Gitman, Lawrence J., 1995. "Bridging the theory-practice gap in corporate finance: A survey of chief financial officers," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(1), pages 73-87. [Downloadable!] (restricted)
  11. Jayaraman, Narayanan & Shastri, Kuldeep, 1988. "The Valuation Impacts of Specially Designated Dividends," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(03), pages 301-312, September. [Downloadable!]
  12. Lie, Erik, 2000. "Excess Funds and Agency Problems: An Empirical Study of Incremental Cash Disbursements," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(1), pages 219-47.
  13. Gombola, Michael J. & Liu, Feng-Ying, 1999. "The Signaling Power of Specially Designated Dividends," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(03), pages 409-424, September. [Downloadable!]
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