Share repurchases,catering, and dividend substitution |
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| Institution: | 1. Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, China;2. School of Business, Renmin University of China, China;3. Henry B. Tippie College of Business, University of Iowa, United States;4. School of Management, State University of New York (SUNY) at Buffalo, United States;1. New York University, New York, NY, USA;2. Temple University, Philadelphia, PA, USA;3. Securities and Exchange Commission, Washington, DC, USA;1. Izmir University of Economics, Department of Business Administration, Sakarya Caddesi, No:156 35330 Balçova, İzmir, Turkey;2. Atilim University, Department of Business, Kızılcaşar Mahallesi, 06830 İncek Gölbaşı, Ankara, Turkey;1. Montana State University, 408 Jabs Hall, Bozeman, MT 59717, USA;2. Singapore Management University, 50 Stamford Road, 178899, Singapore;3. Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai 200433, China;4. University of Oklahoma, 253 Adams Hall, Norman, OK 73019, USA |
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| Abstract: | We first extend Baker and Wurgler's (2004a) catering theory of dividends to share repurchases. Consistent with the notion that firms cater to investor demand for share repurchases, we report evidence that the market's time-varying repurchase premium positively affects firms' choice to repurchase shares. Next, we use the catering behavior as a novel framework for testing the dividend substitution hypothesis. Consistent with the notion that managers consider dividends and share repurchases to be substitute payout mechanisms, we find that the dividend premium negatively affects the repurchase choice, whereas the repurchase premium negatively affects the choice to pay dividends. |
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