Dividends, Stock Repurchases, and the Lintner Model: A Dynamic Panel Data Analysis of German Firms

Abstract

We analyze how the introduction of repurchases in 1998 and a major tax reform in 2001 affected the payout policy of German firms. To this end we estimate Lintner (1956) partial adjustment models for both dividends and total payouts. We also analyze the implications on payout of changes in both permanent and transitory earnings. Our results are inconsistent with the hypothesis that dividends and repurchases are close substitutes. They are also inconsistent with the prediction that tax considerations are a major driver of payout decisions. Rather, our results support the flexibility hypothesis which predicts that dividends are used to disburse permanent earnings while repurchases are used to disburse transitory earnings

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