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Time-Series Behavior of Share Repurchases and Dividends

Published online by Cambridge University Press:  06 April 2009

Bong-Soo Lee  and
Oliver Meng Rui
Bong-Soo Lee
Affiliation:
blee2@cob.fsu.edu, Department of Finance, College of Business, Florida State University, Tallahassee, FL 32306 and blee2@kgsm.kaist.ac.kr, KAIST Graduate School of Finance, 207–43 Cheongryangri 2-dong, Dongdaemun-gu, Seoul 130–722, Republic of Korea
Oliver Meng Rui
Affiliation:
oliver@baf.msmail.cuhk.edu.hk, Faculty of Business Administration, The Chinese University of Hong Kong, Shatin, Hong Kong, China
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Abstract

Given the growth in the importance and popularity of share repurchases, we use an alternative time-series approach to test two hypotheses on the motives for share repurchases and dividends: the flexibility hypothesis and the substitution hypothesis. By investigating both share repurchase and dividend payout policies in the context of a time-series vector autoregression, we account for the dynamic and multi-dimensional nature of the two payout policies. We find that share repurchases are associated with temporary components of earnings, whereas dividends are not, and that share repurchases and dividends are imperfect substitutes.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 1 , March 2007 , pp. 119 - 142
Copyright
Copyright © School of Business Administration, University of Washington 2007

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