Market selection and payout policy under majority rule
Beker, Pablo (2007) Market selection and payout policy under majority rule. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.814).
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The purpose of this paper is to explain how the choice between distributing cash through dividends or shares repurchases affects the firm’s ability to raise capital in the financial market. I assume investors have quadratic preferences over wealth but different prior beliefs about the likelihood a distribution takes place. At date zero agents purchase shares given their expectation about the firm’s payout method. At date 1 the firm announces whether the payout takes place that period. As in Brennan and Thakor , investors with different shareholdings have different incentives to gather information and, therefore, heterogeneous preferences about payout methods at date 1. I assume the firm adopts the payout method preferred by the majority of shareholders at date 1 under the one share/one vote rule. At date 2 the firm is liquidated and the remaining output is distributed among its shareholders. If at date zero agents disagree but not too much on the probability a distribution takes place, I show that a firm expected to pay dividends raises strictly more financial capital than an otherwise identical firm which is expected to repurchase shares. Therefore, a larger fraction of cash is distributed as dividend than through repurchases. One concludes that even in the presence of a small tax disadvantage financial markets favor dividend paying firms.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Dividends, Corporations -- Finance, Equilibrium (Economics), Rational expectations (Economic theory), Speculation|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Official Date:||14 September 2007|
|Number of Pages:||37|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Spain. Ministerio de Ciencia y Tecnología (MCT), Instituto Valenciano de Investigaciones Económicas (IVIE)|
|Grant number:||BEC2001-0980 (MCT)|
 F. Allen and R. Michaely, Payout Policy, forthcoming in North-Holland Handbook of the Economics of Finance edited by G. Constantinides, M. Harris and R. Stultz., chapter 7, vol. 1.A.
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