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Why would firms choose dividends over share repurchases?

Jansson, Emma LU and Janesiripanich, Chonnikarn LU (2018) NEKN02 20181
Department of Economics
Abstract
This study investigates the relationship between the two different payout policies, dividends and
share repurchases, and firm value in the Swedish market. We aim to clarify how the lack of
difference in taxation of dividends and capital gains in Sweden affects investors’ preferences for
different payout policies and whether a certain payout policy incentivizes investor to pay extra for
a firm that applies this policy.
The study is performed through a panel regression on Swedish firms for the period 1987-2017.
Market to book value is used as a proxy for firm value. The market to book value is defined in two
different ways; market value over book value of asset and market value over book value of equity.
To capture the most accurate... (More)
This study investigates the relationship between the two different payout policies, dividends and
share repurchases, and firm value in the Swedish market. We aim to clarify how the lack of
difference in taxation of dividends and capital gains in Sweden affects investors’ preferences for
different payout policies and whether a certain payout policy incentivizes investor to pay extra for
a firm that applies this policy.
The study is performed through a panel regression on Swedish firms for the period 1987-2017.
Market to book value is used as a proxy for firm value. The market to book value is defined in two
different ways; market value over book value of asset and market value over book value of equity.
To capture the most accurate relationships, several different regressions are defined. The sample
is also divided into sub-periods in order to test for the robustness of the results.
The results show a significantly positive relationship between firm value and dividends. This
implies that investors value dividend-paying firms higher than non-paying firms and are willing to
pay extra for dividend-paying firms. Furthermore, no significant relationship could be found
between firm value and share repurchase, implying that investors, in general, do not consider a
repurchasing firm more or less valuable than a non-repurchasing firm. It can, therefore, be
concluded that when the tax effect is removed, the significance of share repurchases is diminished
while dividends still have a value-adding effect on firm value. However, looking at the evolution
of the relationship between firm value and the two payout policies over time, it can be seen that
the significance of share repurchases increases in the last three years of a sample period. Three
possible explanations are presented to this change: an increase in investor protection, the financial
crisis, and the shareholder heterogeneity.
The availability of data for share repurchases in Swedish firms is low and a limiting factor in this
study. Few studies have been on this topic for the Swedish market and further research would,
therefore, be desirable to confirm the implications of this study. (Less)
Please use this url to cite or link to this publication:
author
Jansson, Emma LU and Janesiripanich, Chonnikarn LU
supervisor
organization
course
NEKN02 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
Dividend, Share repurchase, Firm value, Panel data
language
English
id
8947288
date added to LUP
2018-07-02 15:40:34
date last changed
2018-07-02 15:40:34
@misc{8947288,
  abstract     = {This study investigates the relationship between the two different payout policies, dividends and
share repurchases, and firm value in the Swedish market. We aim to clarify how the lack of
difference in taxation of dividends and capital gains in Sweden affects investors’ preferences for
different payout policies and whether a certain payout policy incentivizes investor to pay extra for
a firm that applies this policy.
The study is performed through a panel regression on Swedish firms for the period 1987-2017.
Market to book value is used as a proxy for firm value. The market to book value is defined in two
different ways; market value over book value of asset and market value over book value of equity.
To capture the most accurate relationships, several different regressions are defined. The sample
is also divided into sub-periods in order to test for the robustness of the results.
The results show a significantly positive relationship between firm value and dividends. This
implies that investors value dividend-paying firms higher than non-paying firms and are willing to
pay extra for dividend-paying firms. Furthermore, no significant relationship could be found
between firm value and share repurchase, implying that investors, in general, do not consider a
repurchasing firm more or less valuable than a non-repurchasing firm. It can, therefore, be
concluded that when the tax effect is removed, the significance of share repurchases is diminished
while dividends still have a value-adding effect on firm value. However, looking at the evolution
of the relationship between firm value and the two payout policies over time, it can be seen that
the significance of share repurchases increases in the last three years of a sample period. Three
possible explanations are presented to this change: an increase in investor protection, the financial
crisis, and the shareholder heterogeneity.
The availability of data for share repurchases in Swedish firms is low and a limiting factor in this
study. Few studies have been on this topic for the Swedish market and further research would,
therefore, be desirable to confirm the implications of this study.},
  author       = {Jansson, Emma and Janesiripanich, Chonnikarn},
  keyword      = {Dividend,Share repurchase,Firm value,Panel data},
  language     = {eng},
  note         = {Student Paper},
  title        = {Why would firms choose dividends over share repurchases?},
  year         = {2018},
}