The Cash-Flow Permanence and Information Content of Dividend Increases Versus Repurchases

By W. Guay, Jarrad Harford. 2000

469 citations recorded by the source corpus.

We hypothesize that firms choose dividend increases to distribute relatively permanent cash-flow shocks and repurchases to distribute more transient shocks. As predicted, we find that post-shock cash flows of dividend increasing firms exhibit less reversion to pre-shock levels compared with repurchasing firms. We also examine whether the stock market uses the announcement of the payout method to update its beliefs about the permanence of cash-flow shocks. Controlling for payout size and the market's expectation about the permanence of the cash-flow shock, the stock price reaction to dividend increases is more positive than the reaction to repurchases.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/3b97a561adf0240d21638dbd6c576c7dea33d755

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Citations in the corpus

On the Timing of Dividend Initiations (2007, unknown): “Jagannathan, Stephens and Weisbach (2000) and Guay and Harford (2000) have found that firms use repurchases to pay out volatile cash flows, while they use regular dividends to pay out permanent cash flows.”
Financial flexibility and the choice between dividends and stock repurchases (2000, methodology): “2 Guay and Harford (2000) report similar conclusions using a di!erent empirical approach.”
Payout Policy Through the Financial Crisis: The Growth of Repurchases and the Resilience of Dividends (2015, unknown): “Dividends are even more puzzling today given the availability of stock repurchases, which offer greater flexibility, tax advantages, and other benefits (Guay and Harford, 2000; Skinner, 2008).”
Do Firms Manage Earnings to Meet Dividend Thresholds (2008, unknown): “Cash flow shock and cash flow permanence are defined as in Guay and Harford (2000). Cash flow shock is the average cash flow to lagged assets over years t and t 1 minus the average cash flow to lagged assets in years t 2 to t 4, where year t is the year in which accruals are computed.”
Financial Flexibility, Performance, and the Corporate Payout Choice* (2005, background): “2000 and Guay and Harford 2000). In support of this assumption, Stephens and Weisbach (1998) report that a large fraction of firms that announce open-market repurchase programs end up repurchasing no or very few shares, suggesting that,”
The Evolving Relation Between Earnings, Dividends, and Stock Repurchases (2008, unknown): “…years when earnings increase by amounts that exceed a long-run sustainable growth rate, since one of the advantages of repurchases over regular dividends is that firms are not committed to making a certain level of payments every year (e.g., see Jagannathan et al., 2000; Guay and Harford, 2000).”
What do dividends tell us about earnings quality? (2009, background): “Guay and Harford (2000) find that cash flow shocks associated with dividend increases are more permanent than those associated with stock repurchases and that the market’s reaction to dividend increases is correspondingly more positive.”
Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play? (2000, background): “Guay and Harford (2000) and Jagannathan, Stephens, and Weisbach (2000) both emphasize the flexibility of share repurchases as a means to distribute cash flow, particularly cash flows that are not likely to be sustained indefinitely.”