Dividends, Stock Repurchases, and Valuation
12 Pages Posted: 14 Jun 2006
Abstract
In recent years, there has been a surge in repurchases relative to dividends. These repurchases are frequently interpreted as being perfect substitutes for dividends. In fact, it is often suggested that firms consciously substitute repurchases for dividends in order to minimize shareholder tax obligations. From a valuation standpoint, treating repurchases and dividends as substitutes is hazardous, particularly because repurchases are often part of larger transactions that involve reissuing shares. For instance, shares are frequently repurchased so that they can be delivered to executives who are exercising options. This paper examines the valuation impact of repurchases from both a theoretical and an empirical perspective. It demonstrates that to apply standard valuation models unambiguously it is not enough to know the amount of repurchases. The full details of the repurchase transaction are required.
JEL Classification: G00, G12, G30
Suggested Citation: Suggested Citation
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