Narrow Results

This paper examines stock repurchases from an agency perspective by identifying agency costs across three dimensions — interest conflicts and information asymmetry, managerial discretion, and the use of alternative mechanisms to mitigate agency conflicts. We use ownership structure as a proxy for interest conflicts and information asymmetry, employ cash balance and free cash flow as two measures of managerial discretion, and consider cash dividends and interest-bearing liabilities as alternative vehicles for distributing cash. We find that a monitoring structure motivates managers to mitigate agency costs through stock repurchases. Particularly, monitored firms with higher levels of cash balance prefer cash dividends to stock repurchases, whereas monitored firms with more cash dividends repurchase more shares because of their stronger incentive to mitigate agency costs. However, when firms have a very high level of dividends, they substitute stock repurchases for dividends to avoid a dividend cut in the future.

Departing from the traditional cash flow rights-dividend policy framework, this study investigates whether the level of control rights and the types of ultimate controlling shareholders (UCSs) of listed firms in China influence their cash dividend payout. We find that the level of control rights is positively associated with both the probability to pay and the level of cash dividend payout, which indicates that UCSs use cash dividends to reduce the agency cost of free cash flow and redirect listed firms’ cash balance. Furthermore, different types of UCSs influence dissimilarly on the controlled firms’ cash dividends, which can be attributed to the backgrounds of these UCSs originating from China’s unique partial share issuance privatization process.

This paper relates informed repurchases to firm information asymmetry. We propose a new measure of informed repurchases, which is based on causality tests relating repurchase information to firm returns. Our results indicate that informed repurchases show larger abnormal returns surrounding the announcement of an open market share repurchase, which suggests the market at least partially recognizes informed repurchases. This holds after controlling for conventional information asymmetry proxies, such as firm size, number of analysts following, and analyst forecast dispersion, indicating that the market is aware of repurchase specific information not captured by traditional information asymmetry proxies. Informed repurchases demonstrate larger long-term abnormal returns at one, two, and three-year windows than high traditional information asymmetry repurchases.

We study the effect of change in the organizational structure from a corporation to a real estate investment trust (REIT) on the firm value. Changing the organizational structure from a corporation to a REIT could result in an increase in the firm value, and some companies may be motivated to change their organizational structure because of this. We examine three possible sources of gains in the firm value from such a change in the organizational structure. They are the potential tax savings, reduction in agency costs of managerial discretion, and increase in the price multiples after the conversion. We examine the changes in the firm value of firms that announce conversion to a REIT during 1990–2016. We find that the announcement period returns are positive and strongly significant. Consistent with the tax hypothesis, the announcement period returns are positively related to the effective tax rate of the sample firms. Consistent with the managerial discretion hypothesis, the announcement period returns are positively related to the level of free cash flow of low growth firms. Consistent with the mis-valuation hypothesis, the announcement period returns are higher when REIT valuations are higher relative to the sample firms.

In this paper, we examine the relationship between ownership concentration and dividend policy for Thai publicly listed companies. High family ownership firms have higher dividend payouts than low family ownership firms, which we interpret to mean high family ownership firms follow a more rational dividend policy. This finding is consistent with the prediction that agency conflicts between the managers and shareholders are lower at firms with a controlling shareholder. The evidence is robust through different econometric specifications; robust when the level used to determine the extent of family ownership (family control) is lowered to 10% of the outstanding shares; and robust to the inclusion of the ownership wedge as a proxy for the severity of agency conflicts.

Using a large sample of U.S. bank holding companies (BHC) from 2000:Q1–2017:Q4, we investigate the impacts of dividend policy to bank earnings management, and document that banks that pay dividends tend to be less opaque than banks that do not pay dividends. The dividend policy not only impacts the conditional average earnings management of banks, but also exerts influence on their dispersion. The impact of dividend policy appears to be more profound for highly opaque banks. We identify different conditions that motivate different discretionary behaviors of banks, which allows us to better observe different managerial motives between dividend-paying and dividend-non-paying banks. Under high information asymmetry context, there is valuably additional information conveyed by paying dividends, and it follows that the role of dividends as a means of conveying information is more pronounced. For banks subject to high agency problems, paying dividends make them to be less opaque through reducing the discretionary behaviors.

Following the dividend flexibility hypothesis used by DeAngelo and DeAngelo (2006), Blau and Fuller (2008), and others, we theoretically extend the proposition of DeAngelo and DeAngelo’s (2006) optimal payout policy in terms of the flexibility dividend hypothesis. In addition, we also introduce growth rate, systematic risk, and total risk variables into the theoretical model.

To test the theoretical results derived in this paper, we use data collected in the US from 1969 to 2009 to investigate the impact of growth rate, systematic risk, and total risk on the optimal payout ratio in terms of the fixed-effect model. We find that based on flexibility considerations, a company will reduce its payout when the growth rate increases. In addition, we find that a nonlinear relationship exists between the payout ratio and the risk. In other words, the relationship between the payout ratio and risk is negative (or positive) when the growth rate is higher (or lower) than the rate of return on total assets. Our theoretical model and empirical results can therefore be used to identify whether flexibility or the free cash flow hypothesis should be used to determine the dividend policy.

Buyback programs are often used by firms for different purposes, including distributing excess cash to shareholders and signal that the stock price is underpriced. The first purpose of this chapter is to review studies of buyback programs and to highlight that fundamentals-based hypotheses are problematic in financial turmoil. We will show how buyback programs add value to shareholders while also identifying some situations in which they can destroy value. The second purpose is to present the pros and cons of buyback programs to shareholders, particularly during financial turmoil.

Following the dividend flexibility hypothesis used by DeAngelo and DeAngelo (2006), Blau and Fuller (2008), and others, we theoretically extend the proposition of DeAngelo and DeAngelo’s (2006) optimal payout policy in terms of the flexibility dividend hypothesis. We also introduce growth rate, systematic risk, and total risk variables into the theoretical model. In addition, based upon Lee and Alice (2021), we discuss the implication of the existence of optimal payout ratio in financial analysis and decision for a company.

To test the theoretical results derived in this chapter, we use data collected in the US from 1969 to 2009 to investigate the impact of growth rate, systematic risk, and total risk on the optimal payout ratio in terms of the fixed-effect model. We find that based on flexibility considerations, a company will reduce its payout when the growth rate increases. In addition, we find that a nonlinear relationship exists between the payout ratio and the risk. In other words, the relationship between the payout ratio and risk is negative (or positive) when the growth rate is higher (or lower) than the rate of return on total assets. Our theoretical model and empirical results can therefore be used to identify whether flexibility or the free cash flow hypothesis should be used to determine the dividend policy.

This chapter adopts a behavioral approach to explain why firms prefer dividends over stock repurchases (a tender offer auction) as a payout mechanism despite the significant tax disadvantage that dividends yield. We suggest that different shareholders might have different preferences toward stock repurchases, which may stem from differences in their financial literacy, their diverse discount factors, or from similar other idiosyncratic preferences. This divergence of behavior may lead to differences in the number of shares the various groups of shareholders would agree to sell under the tender offer. If the shareholders cannot coordinate so that they all buy the same number of shares, and if the firm makes an underpriced offer, then a value transfer would occur from those who bought more to those who purchased fewer shares. The stockholders, not knowing a priori to which category they belong, will object to this cash disbursement mechanism and may prefer dividends. This chapter develops a formal two-stockholder model that proves the above assertions.