Managerial Flexibility Effect and Information Content of Dividend versus Stock Repurchase

Abstract

This paper tests trade-off and pecking order predictions about stock repurchases and dividends by using a sample of publicly traded U.S. firms from 1983-2018. We find that stock repurchases have the characteristics of dynamic adjustment compared to cash dividends. Examination of the determinants and information content of dividend and repurchases provides evidence supportive of a managerial flexibility effect of stock repurchases in both time-series and cross-sectional tests. Our evidence shows that both the static tradeoff model and the pecking order model explain the stock repurchase behavior of publicly traded U.S. firms.

Keywords: Managerial Flexibility Effect; Payout Policy; Stock Repurchase; Capital Structure; Mean-Reverting