Evidence on How Companies Choose between Dividends and Open-Market Stock Repurchases

University of Alberta School of Business Research Paper No. 2013-1056

Journal of Applied Corporate Finance Volume 11, Issue 1, pages 89–96, Spring 1998

Posted: 2 Jul 2013

See all articles by Eli Bartov

Eli Bartov

NYU Stern School of Business

Jason Lee

University of Alberta

Itzhak Krinsky

Deutsche Bank Alex. Brown

Date Written: June 1, 1997

Abstract

Dividends and open-market stock repurchases are by far the two most common mechanisms for distributing excess cash to shareholders. This article identifies and then tests three potentially important factors for the corporate choice between increasing cash dividends and initiating openmarket stock repurchases. More specifically, the authors argue that companies are more likely to distribute cash to investors through open-market repurchases than through dividend increases when (1) management believes its stock is undervalued, (2) management compensation packages include stock options, and (3) the company's stockholder base is dominated by institutional investors.

To test these three explanations, the authors use a matched-pair design in which each company announcing an open market repurchase program in a given year is matched with a comparable-size firm from the same industry that increased its cash dividends but did not initiate an open-market repurchase program. As predicted, the results suggest that equity undervaluation, management compensation, and the level of institutional holdings are all important contributors to corporate choices between dividend increases and open-market repurchases.

Suggested Citation

Bartov, Eli and Lee, Jason and Krinsky, Itzhak, Evidence on How Companies Choose between Dividends and Open-Market Stock Repurchases (June 1, 1997). University of Alberta School of Business Research Paper No. 2013-1056, Journal of Applied Corporate Finance Volume 11, Issue 1, pages 89–96, Spring 1998, Available at SSRN: https://ssrn.com/abstract=2280827

Eli Bartov (Contact Author)

NYU Stern School of Business ( email )

44 W. 4th Street, Suite 10-96
New York, NY 10012
United States
212.998.0016 (Phone)

Jason Lee

University of Alberta ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-4839 (Phone)
780-492-3325 (Fax)

Itzhak Krinsky

Deutsche Bank Alex. Brown

New York, NY
United States

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