Time-Series Behavior of Share Repurchases and Dividends
47 Pages Posted: 3 Oct 2005
Date Written: May 2004
Abstract
Given the growth in the importance and popularity of share repurchases, we use an alternative time-series approach to test various hypotheses on share repurchases and dividends. Each hypothesis is formulated based on a Vector Autoregression (VAR) of relevant variables and characterized as restrictions on the VAR, thus providing a measure of the empirical validity. By investigating both share repurchase and dividend payout policies in a time-series VAR context, we account for the dynamic and multi-dimensional nature of the two payout policies. Therefore, our analysis provides a comprehensive understanding of various hypotheses of dividends as well as those of share repurchases. Our findings can be summarized as follows. First, share repurchases do not contain additional information about future earnings, whereas dividend changes do. Second, share repurchases are significantly related to the undervaluation, whereas dividends are not. Third, share repurchases are strongly associated with temporary components of earnings, whereas dividends are not. Fourth, share repurchases and dividends are not perfect substitutes. They are both complements and substitutes.
Keywords: share repurchase, dividends, VAR identification
JEL Classification: C32, G35
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?
By Eugene F. Fama and Kenneth R. French
-
Dividends, Share Repurchases, and the Substitution Hypothesis
By Gustavo Grullon and Roni Michaely
-
Payout Policy in the 21st Century
By Alon Brav, John R. Graham, ...
-
Payout Policy in the 21st Century
By Alon Brav, Campbell R. Harvey, ...
-
Financial Flexibility and the Choice between Dividends and Stock Repurchases
By Clifford P. Stephens, Murali Jagannathan, ...
-
By Roni Michaely and Franklin Allen
-
By Joan Farre-mensa, Roni Michaely, ...
-
Payout Policy in the 21th Century: The Data
By Alon Brav, Campbell R. Harvey, ...
-
A Catering Theory of Dividends
By Malcolm P. Baker and Jeffrey Wurgler
-
A Catering Theory of Dividends
By Malcolm P. Baker and Jeffrey Wurgler