Signaling with Dividends and Share Repurchases: A Choice between Deterministic and Stochastic Cash Disbursements

Donald B Hausch and James K Seward

The Review of Financial Studies, 1993, vol. 6, issue 1, 121-54

Abstract: We study firms signaling with cash disbursements and show that the choice of a deterministic or a stochastic disbursement depends on a property of the firm's production function that is analogous to absolute risk aversion for a utility function. With decreasing (increasing) absolute risk aversion, the high-quality firm prefers to distinguish itself from the low-quality firm with a stochastic (deterministic) outlay. We then study in detail two common forms of corporate cash distributions: dividends, a deterministic disbursement, and share repurchases, a stochastic disbursement. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1993
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