Dividends versus Stock Repurchases and Long-Run Stock Returns under Heterogeneous Beliefs

Review of Corporate Finance Studies (RCFS), September 2021, 10(3), 578-632

81 Pages Posted: 30 Jun 2013 Last revised: 16 Sep 2021

See all articles by Onur Bayar

Onur Bayar

University of Texas at San Antonio - Carlos Alvarez College of Business

Thomas J. Chemmanur

Boston College - Carroll School of Management

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Date Written: October 1, 2020

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 as well. In equilibrium, the firm distributes value through dividends alone; through a repurchase alone; or through a combination. In some situations, the firm may raise external financing to fund its payout. We also develop results regarding long-run stock returns following dividends and repurchases.

Keywords: Dividends, Stock repurchases, Heterogeneous beliefs, Long-run stock returns, Payout policy

JEL Classification: G32, G35

Suggested Citation

Bayar, Onur and Chemmanur, Thomas J. and Liu, Mark H., Dividends versus Stock Repurchases and Long-Run Stock Returns under Heterogeneous Beliefs (October 1, 2020). Review of Corporate Finance Studies (RCFS), September 2021, 10(3), 578-632, Available at SSRN: https://ssrn.com/abstract=2287322 or http://dx.doi.org/10.2139/ssrn.2287322

Onur Bayar

University of Texas at San Antonio - Carlos Alvarez College of Business ( email )

The University of Texas at San Antonio
One UTSA Circle
San Antonio, TX 78249
United States
210-458-6837 (Phone)
210-458-6320 (Fax)

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

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