A Comparison of the Market Reaction to Specially Designated Dividends and Tender Offer Stock Repurchases

Chhachhi, Indudeep; Davidson, Wallace N.

doi:10.2307/3666216

Cited by 17 publications

(9 citation statements)

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“…Stock price reactions elicited a more positive response in case of share repurchases than dividends (Choi & Chen, 1997;Chhachhi & Davidson;Lie, 2000). Whereas Guay & Harford (2000) results found a higher positive market response to dividend increases when compared to open market repurchases.…”

Section: The Choice Between Dividends and Share Repurchasesmentioning

confidence: 58%

Signaling mechanism of corporate payout policy: A case of Indian firms

Anwar¹,

Singh²,

Jain³

2016

10.5267/j.ac

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Historically, cash dividends are the most important form of payout policy; however, they have been losing popularity relative to share repurchases. This paper examines the signaling effect of the payout decisions namely, cash dividends and share repurchases by BSE 500 index companies. It attempts to uncover the underlying forces behind the firm's choices of payout policy in the Indian context. Using the standard 'Event Standard Methodology', a strong case of positive signaling is reported in case of repurchase announcements vis-a-vis cash dividend announcements. It is observed that cash dividends are not perceived by investors as positive signals as they prefer their earnings to be retained by the companies for growth prospects. In case of share repurchases, the existence of undervaluation, signaling and wealth transfer hypotheses is reported, consistent with the fact the share repurchases are welcomed by the Indian companies. The results would provide insights into the economics of the choice between cash dividends versus share repurchases as payout mechanism adopted by the sample companies. The findings would also be useful to the academia as well as industry in understanding the payout practice and the extent to which the Indian managers use the assumptions, models and decision rules regarding payout.

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Section: The Choice Between Dividends and Share Repurchasesmentioning

confidence: 58%

Signaling mechanism of corporate payout policy: A case of Indian firms

Anwar¹,

Singh²,

Jain³

2016

10.5267/j.ac

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“…For example, for tender offers over the period 1970-1999, Anderson and Dyl (2004) find the median percentage of shares sought is 17.32, the median tender offer premium is 20.55%, and the median three-day market-adjusted announcement period return is 10.73%. In contrast, for open market repurchases over the period 1980-1997, Grullon and Michaely (2004 find the median percentage of shares sought is 5.00 and the median three-day market-adjusted announcement period return is 1.82%. By definition, the premium paid in open market repurchase transactions is zero.…”

mentioning

confidence: 87%

“…Jensen (1986) defines free cash flow as “ … cash flow in excess of that required to fund all projects that have positive net present values … ” and suggests cash payouts to shareholders can reduce agency conflicts between owners and managers. Researchers have long acknowledged tender offers are but one mechanism through which cash distributions can be effected and have compared and contrasted tender offers versus open market share repurchases (Baker, Gallagher, and Morgan, 1981; Vermaelen, 1981; Asquith and Mullins, 1986; Gay, Kale, and Noe, 1991), specially designated dividends (Asquith and Mullins, 1986; Howe, He, and Kao, 1992; Chhachhi and Davidson, 1997; Lie, 2000), and regular dividend increases (Guay and Harford, 2000; Lie, 2000). Further, issuer tender offers take two forms, fixed price or Dutch auction, and the differences between the two forms have been analyzed (Comment and Jarrell, 1991; Gay et al, 1991; Kamma, Kanatas, and Raymar, 1992; Lee, Mikkelson, and Partch, 1992; Persons, 1994; Lie and McConnell, 1998).…”

Section: Literature Reviewmentioning

confidence: 99%

An Empirical Examination of the Stated Purposes of Issuer Tender Offers to Purchase Common Stock

Dunn

Fayman

McNutt

2011

Financial Management

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This paper documents the purposes of issuer tender offers to repurchase stock, as stated in Securities and Exchange Commission (SEC) disclosures, over the period 1994‐2006. We explore whether stated purposes relate to announcement period returns and find returns are significantly lower when repurchases replace dividends, distribute cash from unspecified sources, or occur subsequent to third‐party tender offers. Announcement period returns are significantly higher when repurchases are viewed by management as the best investment opportunity available or when they occur subsequent to previous repurchase programs. Finally, we find evidence in support of signaling theory and Jensen's (1986) agency cost of free cash flow theory.

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“…Thus, in addition to dividends, managers should simultaneously use alternative signals to convey their private information to the market. Among alternative potential signals, the literature has focused on investment (John and Mishra, 1990), share repurchases (Chhachhi andDavidson, 1997, Grullon andMichaely, 2002), and insider holdings Mishra, 1990, John andLang, 1991). John and Lang (1991) provide the basis for a new approach to the signalling theory of dividends by examining how the information content of dividends may be nuanced by insider trading prior to the dividend announcement.…”

Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Dividends and Market Signalling: an Analysis of Corporate Insider Trading

Brío

Miguel

2010

Euro Fin Management

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This study tests the multiple-signal theory of dividends of John and Lang (1991) in the context of a European market. Our evidence shows that investors are more sensitive to insider trading signals than to signalled changes in existing dividends. In effect, the insider sales signal is universally understood as bad news. After controlling for the quality of a firm's investment opportunities, investors are found to penalise dividend outflows by mature firms that exhibit more informed insider sales activity. Finally, we offer an innovative exploration of the role of earnings announcements in market reaction to the dividend signal.

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A Comparison of the Market Reaction to Specially Designated Dividends and Tender Offer Stock Repurchases

Cited by 17 publications

References 0 publications

Signaling mechanism of corporate payout policy: A case of Indian firms

Signaling mechanism of corporate payout policy: A case of Indian firms

An Empirical Examination of the Stated Purposes of Issuer Tender Offers to Purchase Common Stock

Dividends and Market Signalling: an Analysis of Corporate Insider Trading

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