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Share repurchases, catering, and dividend substitution

Author

Listed:
  • Jiang, Zhan
  • Kim, Kenneth A.
  • Lie, Erik
  • Yang, Sean

Abstract

We first extend Baker and Wurgler's (2004a) catering theory of dividends to share repurchases. Consistent with the notion that firms cater to investor demand for share repurchases, we report evidence that the market's time-varying repurchase premium positively affects firms' choice to repurchase shares. Next, we use the catering behavior as a novel framework for testing the dividend substitution hypothesis. Consistent with the notion that managers consider dividends and share repurchases to be substitute payout mechanisms, we find that the dividend premium negatively affects the repurchase choice, whereas the repurchase premium negatively affects the choice to pay dividends.

Suggested Citation

  • Jiang, Zhan & Kim, Kenneth A. & Lie, Erik & Yang, Sean, 2013. "Share repurchases, catering, and dividend substitution," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 36-50.
  • Handle: RePEc:eee:corfin:v:21:y:2013:i:c:p:36-50
    DOI: 10.1016/j.jcorpfin.2013.01.004
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:advacc:v:34:y:2016:i:c:p:41-54 is not listed on IDEAS
    2. repec:eee:finana:v:56:y:2018:i:c:p:112-126 is not listed on IDEAS
    3. Minnick, Kristina & Rosenthal, Leonard, 2014. "Stealth compensation: Do CEOs increase their pay by influencing dividend policy?," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 435-454.
    4. Sungsin Kim & Ji-Yong Seo, 2014. "A Study On Dividend Determinants For Korea's Information Technology Firms," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 10(2), pages 1-12.
    5. Kulchania, Manoj, 2013. "Catering driven substitution in corporate payouts," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 180-195.
    6. Andriosopoulos, Dimitris & Lasfer, Meziane, 2015. "The market valuation of share repurchases in Europe," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 327-339.
    7. Banyi, Monica L. & Kahle, Kathleen M., 2014. "Declining propensity to pay? A re-examination of the lifecycle theory," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 345-366.
    8. Moon, Joonho & Lee, Won Seok & Dattilo, John, 2015. "Determinants of the payout decision in the airline industry," Journal of Air Transport Management, Elsevier, vol. 42(C), pages 282-288.

    More about this item

    Keywords

    Share repurchases; Dividends; Payout policy; Catering; Substitution;

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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