A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchases and Dividends




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    • Ofer is from the Kellogg Graduate School of Management (KGSM), Northwestern University, and the Faculty of Management, Tel Aviv University, and Thakor is from the School of Business, Indiana University. We gratefully acknowledge the helpful comments of participants in the finance and microeconomics workshops at Indiana University, the North Carolina-Duke Finance Workshop, a finance seminar at State University of New York-Buffalo, a finance seminar at The University of Florida, the finance/accounting workshop at the Indian Institute of Management, The Western Finance Association meeting at Colorado Springs, and a finance seminar at New York University, as well as the helpful comments of an anonymous referee of this Journal, Kose John, David Nachman, George Kanatas, Lawrence Glosten, Avner Kalay, Marti Subrahmanyam, Joe Williams, and particularly Yuk-Shee Chan and Rob Heinkel. The usual disclaimer applies. This work was initiated while Thakor was visiting the KGSM at Northwestern University.


This paper develops a model in which managers can signal their firms' true values by using either a dividend or a stock repurchase or both. The authors explain a number of stylized facts about these cash-disbursement mechanisms, particularly those concerning the relative magnitudes of stock price responses to dividends and repurchases. Most importantly, they explain why a stock repurchase elicits a significantly higher price response, on average, than a dividend announcement.