The Cash-Flow Permanence and Information Content of Dividend Increases Versus Repurchases

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payout policy
stock repurchase
buy-back
payout choice
dividend signaling
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Guay, Wayne R
Harford, Jarrad
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We hypothesize that firms choose dividend increases to distribute relatively permanent cash-flow shocks and repurchases to distribute more transient shocks. As predicted, we find that post-shock cash flows of dividend increasing firms exhibit less reversion to pre-shock levels compared with repurchasing firms. We also examine whether the stock market uses the announcement of the payout method to update its beliefs about the permanence of cash-flow shocks. Controlling for payout size and the market's expectation about the permanence of the cash-flow shock, the stock price reaction to dividend increases is more positive than the reaction to repurchases.

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2000-09-01
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Journal of Financial Economics
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