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

72 Pages Posted: 30 Jun 2013 Last revised: 14 Feb 2017

See all articles by Onur Bayar

Onur Bayar

University of Texas at San Antonio, 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: February 2017

Abstract

We analyze a firm's choice between dividend payments and stock repurchases under heterogeneous beliefs and the subsequent long-term stock return performance of firms adopting the two forms of payout. Firm insiders, owning a certain fraction of its equity, choose between paying out its cash available through a dividend payment or a stock repurchase, as well as the level of investment in its project. Outsiders have heterogeneous beliefs about project success, and may have beliefs different from firm insiders as well. In equilibrium, the firm distributes value through dividends alone; through a repurchase alone; or through a combination. We characterize the conditions under which each form of payout occurs, as well as the firm's optimal scale of investment. We show that, in some situations, the firm may raise external financing to fund its payout in equilibrium, with the form of external financing (equity or debt) chosen jointly with its method of payout and scale of investment. Finally, we develop a number of new results characterizing a firm's long-run stock returns following dividend payments and stocks repurchases, and show how, consistent with the evidence, positive or negative long-run stock returns following such payouts may arise in equilibrium.

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 (February 2017). 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, 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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