Share Repurchases, Dividends, and Executive Options: Empirical Evidence from Finland

Abstract

This paper reports empirical results on the determinants of the authorization decision for share repurchases and dividends in Finland. We use a data set with precise data on share repurchases as well as characteristics for the programs. Contrary to the U.S., we use a data set where 41% of the options are dividend protected, which allows us to seprate between the option funding and hypothesis for the choice of the distribution method. We find that tax effects in terms of higher foreign ownership is the main determinant for share repurchases in Finland. We also find evidence in support of both the signalling and agency cost hypotheses for cash distributions, especially in the case of share repurchases. Finally, we find a significant difference between companies with or without dividend protected options. When options are dividend protected, the relationship between dividend distributions and the scope of the options program turns to a significantly positive one instead of the negative one documented on U.S. data. This gives some support for the substitution/managerial wealth hypothesis as a determinant for the choice of the distribution method.