Time-Series Behavior of Share Repurchases and Dividends

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