Cash Distribution to Shareholders by Dividends and Share Repurchases – Determining factors in decision-making and valuation effects

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School of Business | Bachelor's thesis
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Date

2023

Department

Laskentatoimen laitos

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Mcode

Degree programme

Laskentatoimi

Language

en

Pages

25

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Abstract

Cash distribution is an important part of delivering value to shareholders, and dividend pay-ments and share repurchases are common methods of cash distribution. This thesis will provide insights into payout policy decision-making, focusing on dividends and share repurchases. Objective of this thesis is to find out the determining factors of decision-making process and the valuation effects of these cash distribution methods, in order to help companies make optimal decisions. Methodology of this thesis is a literature review. Reviewed literature consists of peer reviewed research articles from the fields of accounting and finance. From the large mass of sources, this thesis attempts to find and critically evaluate the most relevant and accurate information regarding dividends and share repurchases, in order to provide an insightful overview of research findings. Based on the literature reviewed in this thesis, dividend payments and share repurchases serve slightly different purposes in companies’ payout policies. Therefore, determining factors in decision-making also differ. Dividend payments represent long-term payout policy, so long-term cash flows need to be considered in decision-making. Attracting institutional investors has also been considered to be a significant factor in dividend decisions. Share repurchases are considered to be a short-term payout method and can be used to distribute temporary cash flows to shareholders. Share repurchases offer more flexibility and taxation advantages compared to dividends. The differences between dividends and share repurchases allow them to also be used simultaneously, if needed. To find out the valuation effects of dividends and share repurchases, this thesis reviews studies about market reactions to changes in dividends and initiations of share repurchase programs. Market tends to react positively to share repurchases, which has been explained by indirect information about undervaluation of shares that share repurchases signal to the market. Dividend raises/initiations are followed by positive reactions by the market as well but usually the reaction is weaker. Dividend cuts/omissions, on the other hand, are followed by significant negative reactions by the market. Reactions to dividend changes are explained by the stickiness of dividends. Dividend changes usually confirm long-term changes in companies’ operating performance and therefore causes adjustments in expectations.

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Thesis advisor

Pham, Ly

Keywords

dividends, payout policies, share repurchases, valuation

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https://urn.fi/URN:NBN:fi:aalto-202310016094

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[kand] Kauppakorkeakoulu / BIZ (Open Access)