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
Date Written: October 1, 2020
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: Suggested Citation