A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchases and Dividends

  • Author(s): AHARON R. OFER, ANJAN V. THAKOR
  • Published: Apr 30, 2012
  • Pages: 365-394
  • DOI: 10.1111/j.1540-6261.1987.tb02572.x

ABSTRACT

This paper develops a model in which managers can signal their firms' true values by using either a dividend or a stock repurchase or both. The authors explain a number of stylized facts about these cash‚Äźdisbursement mechanisms, particularly those concerning the relative magnitudes of stock price responses to dividends and repurchases. Most importantly, they explain why a stock repurchase elicits a significantly higher price response, on average, than a dividend announcement.

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