Behavioral Explanations for the Preferences of Dividends Over Stock Repurchases

Jacob Oded and Itzhak Venezia

Chapter 2 in Behavioral Finance:Beyond the Basics, 2024, pp 21-36 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter adopts a behavioral approach to explain why firms prefer dividends over stock repurchases (a tender offer auction) as a payout mechanism despite the significant tax disadvantage that dividends yield. We suggest that different shareholders might have different preferences toward stock repurchases, which may stem from differences in their financial literacy, their diverse discount factors, or from similar other idiosyncratic preferences. This divergence of behavior may lead to differences in the number of shares the various groups of shareholders would agree to sell under the tender offer. If the shareholders cannot coordinate so that they all buy the same number of shares, and if the firm makes an underpriced offer, then a value transfer would occur from those who bought more to those who purchased fewer shares. The stockholders, not knowing a priori to which category they belong, will object to this cash disbursement mechanism and may prefer dividends. This chapter develops a formal two-stockholder model that proves the above assertions.

Keywords: Market Efficiency; Cross-Sectional Anomalies; Arbitrage Trading Activity; Exploiting Mispricing Dividends; Stock Repurchase; Annuity; Financial Decisions; Lump Sum. Retirement Savings; Behavioral Factors; Disruptive Innovation; Market Transition; Investments; Analyst Recommendations; Coverage Initiation; Stock Market Reaction; Artificial Intelligence; Professional Investors (search for similar items in EconPapers)
JEL-codes: G4 (search for similar items in EconPapers)
Date: 2024
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