Distributing excess cash: the role of specially designated dividends

H. Kent Baker, Tarun Mukherjee and Gary Powell
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H. Kent Baker: American University
Tarun Mukherjee: University of New Orleans

No 2004-07, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: This study explores why firms distribute excess cash as specially designated dividends (SDDs) instead of using regular dividends or repurchasing shares. We survey top managers of NASDAQ, AMEX, and NYSE firms issuing at least one SDD between 1994 and 2001. The results show that firms tend to pay SDDs when they experience strong earnings and cash flows and want to increase at least temporarily the yield to shareholders. Having strong earnings and cash flows also provide an impetus for regular dividend increases, but paying regular dividends is part of a firm’s standard dividend policy. The primary motives for repurchasing shares are to take advantage of perceived market undervaluation of the firm’s shares and to improve performance measures, especially. Overall, the results lend support to the signaling explanation for the disbursement of excess funds, but not the free cash flow or wealth transfer explanations.

Keywords: Dividends; Payout policy; Specially designated dividends; Share repurchases (search for similar items in EconPapers)
JEL-codes: G35 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-10-19
New Economics Papers: this item is included in nep-acc, nep-fin and nep-fmk
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