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Dividends versus Stock Repurchases and Long-Run Stock Returns under Heterogeneous Beliefs
[A theory of dividends based on tax clienteles]

Author

Listed:
  • Onur Bayar
  • Thomas J Chemmanur
  • Mark H Liu

Abstract

We analyze a firm’s choice between dividends and stock repurchases under heterogeneous beliefs. Firm insiders, owning a certain fraction of equity, choose between paying out cash available through a dividend payment or a stock repurchase, and simultaneously choose the scale of the firm’s project. Outsiders have heterogeneous beliefs about project success and may disagree with insiders. In equilibrium, the firm distributes value through dividends alone, through a repurchase alone, or through a combination of both. In some situations, the firm may raise external financing to fund its payout. We also develop results for long-run stock returns following dividends and repurchases. (JEL G32, G35)Received June 2, 2020; editorial decision November 3, 2020 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Onur Bayar & Thomas J Chemmanur & Mark H Liu, 2021. "Dividends versus Stock Repurchases and Long-Run Stock Returns under Heterogeneous Beliefs [A theory of dividends based on tax clienteles]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(3), pages 578-632.
    • Handle: RePEc:oup:rcorpf:v:10:y:2021:i:3:p:578-632.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfab002
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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