Abstract

http://ssrn.com/abstract=222730
 
 

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Dividends, Share Repurchases, and the Substitution Hypothesis


Gustavo Grullon


Rice University - Jesse H. Jones Graduate School of Business

Roni Michaely


Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)

April 2000

AFA 2002 Atlanta Meetings

Abstract:     
Over the past 20 years share repurchase programs have become an important payout method for US firms. Are these repurchases substitute for dividends? And if so, why has it taken so long to start to pay shareholders in a way that reduces their tax liability? Analyzing this trend we show that, unlike in the past, young firms have a strong tendency to pay cash through repurchases rather than dividends and that repurchases have become the preferred form of payout among firms initiating cash distributions to their equityholders. Large-established firms also show a higher propensity to payout cash through repurchases. Although we do not find that these firms have been cutting dividends, it seems that they have been financing their repurchase programs with funds that otherwise would have been used to increase dividends. These findings indicate that large-established firms have been gradually substituting repurchases for dividends. We also find evidence that suggests that investors view dividends and share repurchases as substitute payout methods. Specifically, we show that (1) the market reaction to dividend cuts is not significantly different from zero for repurchasing firms and (2) the market reaction surrounding share repurchase announcements is significantly more positive during periods where the benefit of substituting share repurchases for dividends is relatively large. Finally we address the question of why corporations have been waiting for so long to substitute repurchases for dividends. We present evidence consistent with the notion that regulatory constraints inhibited firms from aggressively repurchasing shares until 1982. Our findings may provide a partial explanation for the dividend puzzle.

Number of Pages in PDF File: 51

JEL Classification: G35

working papers series





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Date posted: April 26, 2000  

Suggested Citation

Grullon, Gustavo and Michaely, Roni, Dividends, Share Repurchases, and the Substitution Hypothesis (April 2000). AFA 2002 Atlanta Meetings. Available at SSRN: http://ssrn.com/abstract=222730 or http://dx.doi.org/10.2139/ssrn.222730

Contact Information

Gustavo Grullon (Contact Author)
Rice University - Jesse H. Jones Graduate School of Business ( email )
P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)
HOME PAGE: http://www.ruf.rice.edu/~grullon/
Roni Michaely
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
431 Sage Hall
Ithaca, NY 14853
United States
607-255-7209 (Phone)
607-254-4590 (Fax)
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Michaely/
Interdisciplinary Center (IDC)
P.O. Box 167
Herzliya, 46150
Israel
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References:  33
Citations:  250
Footnotes:  34

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