Financial Flexibility and The Choice Between Dividends and Stock Repurchases

33 Pages Posted: 26 Feb 1999  

Clifford P. Stephens

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Murali Jagannathan

State University of New York (SUNY) at Binghamton

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: February 3, 1999

Abstract

The paper measures the growth in open-market stock repurchases and the manner in which stock repurchases and dividends are used in U.S. corporations. We find that aggregate repurchases have increased dramatically over this period: the number and value of repurchase program announcements has grown from 115 and $15.4 billion in 1985 to 755 and $115 billion in 1996. Actual share repurchases have grown from approximately $8.8 billion in 1985 to over $63 billion in 1996. These repurchases represent an economically important source of payouts, and are responsible for much of the variation in aggregate payouts. Nonetheless they are still small relative to the $142 billion in dividends paid by industrial firms listed on Compustat in 1996. Stock repurchases and dividends are used at different times from one another, by different kinds of firms. Stock repurchases are very pro-cyclical, while dividends increase steadily over time. Dividends are paid by firms with higher "permanent" operating cash flows, while repurchases are used by firms with higher "temporary", non-operating cash flows. Repurchasing firms also have much more volatile cash flows and distributions. These results are consistent with the view that the flexibility inherent in repurchase programs is one reason why they are sometimes used instead of dividends.

JEL Classification: G32, G35

Suggested Citation

Stephens, Clifford P. and Jagannathan, Murali and Weisbach, Michael S., Financial Flexibility and The Choice Between Dividends and Stock Repurchases (February 3, 1999). Available at SSRN: https://ssrn.com/abstract=148548 or http://dx.doi.org/10.2139/ssrn.148548

Clifford P. Stephens (Contact Author)

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
2159 CEBA
Baton Rouge, LA 70803-6308
United States
225-578-6334 (Phone)

Murali Jagannathan

State University of New York (SUNY) at Binghamton ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-4639 (Phone)

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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