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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Abstract

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 [3], 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
Dates:	Date Event 14 September 2007 Published
Number:	No.814
Number of Pages:	37
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access (Creative Commons)
Funder:	Spain. Ministerio de Ciencia y Tecnología (MCT), Instituto Valenciano de Investigaciones Económicas (IVIE)
Grant number:	BEC2001-0980 (MCT)

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