MARKET SELECTION AND PAYOUT POLICY UNDER MAJORITY RULE

Pablo Beker

No 269763, Economic Research Papers from University of Warwick - Department of Economics

Abstract: The purpose of this paper is to explain how the choice between distributing cash through dividends or shares repurchases affects the firm’s ability to raise capital in the financial market. I assume investors have quadratic preferences over wealth but different prior beliefs about the likelihood a distribution takes place. At date zero agents purchase shares given their expectation about the firm’s payout method. At date 1 the firm announces whether the payout takes place that period. As in Brennan and Thakor [3], investors with different shareholdings have different incentives to gather information and, therefore, heterogeneous preferences about payout methods at date 1. I assume the firm adopts the payout method preferred by the majority of shareholders at date 1 under the one share/one vote rule. At date 2 the firm is liquidated and the remaining output is distributed among its shareholders. If at date zero agents disagree but not too much on the probability a distribution takes place, I show that a firm expected to pay dividends raises strictly more financial capital than an otherwise identical firm which is expected to repurchase shares. Therefore, a larger fraction of cash is distributed as dividend than through repurchases. One concludes that even in the presence of a small tax disadvantage financial markets favor dividend paying firms.

Keywords: Agricultural and Food Policy; Marketing; Production Economics (search for similar items in EconPapers)
Pages: 37
Date: 2007-09-14
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:269763

DOI: 10.22004/ag.econ.269763

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