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Stock repurchase waves: An explanation of the trends in aggregate corporate payout policy, Working paper

By Amy K. Dittmar, Robert F. Dittmar, John Graham, Gustavo Grullon, Nellie Liang, Michelle Lowry, Chris Lundblad and Seminar Participants


at Indiana University and the Pennsylvania State University for helpful comments and suggestions. The usual In this paper, we provide evidence that repurchases are replacing dividends. We show this first by examining the source of earnings that drives each distribution mechanism. Contrary to prior research, we find that both dividends and repurchases are a means to distribute permanent earnings. Additionally, consistent with previous research, we find that repurchases are also a mechanism to distribute temporary earnings. Second, we show that the sensitivity of the change in dividend payments to a change in permanent earnings decreased significantly in the 1980s and beyond, as the use of stock repurchases increased, and show that this decrease partially explains the aggregate pattern of stock repurchases. Thus, the evidence in this paper adds to the extensive literature on the importance of stock repurchases and to the growing literature on the aggregate use of dividends over time. In 1997, corporate payout policy rounded a dramatic corner: in aggregate, firms spent more on stock repurchases than on cash dividends. The eclipsing of dividend payments by repurchases reflects two trends that have emerged in the past several decades. First, the use of stock repurchases has dramatically grown over the 1980s and 1990s. Second, at the same time, the number of firm

Year: 2002
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