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).
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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|
|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|Status:||Not Peer Reviewed|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)|
|References:|| 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.  M. J. Barclay and C. W. Smith, Jr, Corporate Payout Policy: Cash Dividends versus Open-Market Repurchases, Journal of Financial Economics 22 (1988), p. 61-82.  M. J. Brennan and A. V. Thakor, Shareholder Preferences and Dividend Policy, The Journal of Finance, XLV, No 4 (1990), p. 993-1018.  H. Crès, Majority Stable Production Equilibria: A Multivariate Mean Shareholder Theorem, HEC School of Management, mimeo (2000.)  P. DeMarzo, Majority Voting and Corporate Control: The Rule of the Dominant Shareholder, The Review of Economic Studies, 60 (1993), p. 713-734.  M. H.Miller and F.Modigliani, Dividend Policy, Growth and the Valuation of Shares , Journal of Business 34, p. 411-433.|
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