The Information Content of Regular Dividends and Share Buybacks for Market Value and Future Earnings in the UK

Abstract

In this paper, we extend previous work on the relationship between corporate distributions and market value. Adopting an information content perspective, we study the relationship between both market value and future earnings and regular dividends and share buybacks, controlling for other accounting variables. Taking insights gained from prior research, we expect that the coefficient of regular dividends will be higher than that for share buybacks in both market value and earnings prediction regression contexts. Our empirical results are consistent with our expectations. The coefficient of regular dividends is significantly higher than that for share buybacks in both market value and earnings prediction regressions on the various samples upon which we estimate the relationships. In additional tests, dividend displacement can be rejected for regular dividends but mainly not for share buybacks. When it can be rejected for share buybacks, it is because share buybacks reduce market value by more than one monetary unit per monetary unit of buyback, not less. Nonetheless, the coefficients of share buybacks in the earnings prediction equations are higher than would be expected given the dividend displacement results in that they are generally positive.