Abstract
Article history: Received July 5, 2015 Received in revised format August 16 2015 Accepted January 6 2016 Available online January 11 2016 Historically, cash dividends are the most important form of payout policy; however, they have been losing popularity relative to share repurchases. This paper examines the signaling effect of the payout decisions namely, cash dividends and share repurchases by BSE 500 index companies. It attempts to uncover the underlying forces behind the firm’s choices of payout policy in the Indian context. Using the standard ‘Event Standard Methodology’, a strong case of positive signaling is reported in case of repurchase announcements vis-a-vis cash dividend announcements. It is observed that cash dividends are not perceived by investors as positive signals as they prefer their earnings to be retained by the companies for growth prospects. In case of share repurchases, the existence of undervaluation, signaling and wealth transfer hypotheses is reported, consistent with the fact the share repurchases are welcomed by the Indian companies. The results would provide insights into the economics of the choice between cash dividends versus share repurchases as payout mechanism adopted by the sample companies. The findings would also be useful to the academia as well as industry in understanding the payout practice and the extent to which the Indian managers use the assumptions, models and decision rules regarding payout. Growing Science Ltd. All rights reserved. 6 © 201
Highlights
Corporate payout decisions are to be one of the strategic decisions that a financial manager has to take for the realization of the corporate goal which is the maximization of the value of the shareholders
This paper examines the signaling effect of the payout decisions namely, cash dividends and share repurchases by Bombay stock exchange (BSE) 500 index companies
The following hypotheses have been formulated: H1: There is no positive signaling in share price behavior around cash dividend announcements
Summary
Corporate payout decisions are to be one of the strategic decisions that a financial manager has to take for the realization of the corporate goal which is the maximization of the value of the shareholders. Shareholder distribution is an area of intense scrutiny. The empirical literature has focused on dividend as the most common type of payout; dividend payments still remain a controversial topic in literature (Black, 1976). An alternative for dividend payment is the share repurchases decision. Dividends and share repurchases are the principal mechanisms by which corporates disburse cash to their shareholders. Several studies have analyzed the responses of share prices to the announcements of these modes of cash distribution
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