Institutional and individual investor preferences for dividends and share repurchases (2024)

This paper examines the effect of individual investors’ dividend tax on the fulfillment of corporate social responsibility (CSR). By introducing the implementation of dividend tax reform (DTR) for individual investors, we present strong evidence that the reduction of the individual investors' dividend tax significantly reduces the fulfillment of CSR activities related to all stakeholders, except for shareholders. A plausible mechanism is that the reform encourages individual investors to increase holding periods, thereby crowding out institutional investors, which further reduces the firms’ external monitoring pressure. The effect is particularly pronounced for firms with high ownership concentration, low individual investor attention, and low executive ownership. By revealing the unintended effect of the individual investors’ DTR on the firms’ fulfillment of CSR, our study presents a clear policy to regulators concerned with CSR and investor protection.

We study dividend fund buying behavior using over 80,000 individual Chinese mutual fund investors from a private Chinese mutual fund account dataset. Based on a variety of specifications and logistic regressions, we empirically investigate investors' characteristics in choosing dividend-paying and/or growth mutual funds under different market scenarios. To the best of our knowledge, this research represents an initial attempt to study individual dividend investors in mutual fund markets. We find that older Chinese investors prefer dividend-paying funds less than growth funds, but this depends on different market conditions, and the age effect shows a nonlinear mode when considering age grouping. Moreover, investors' prior experience plays a crucial role in choosing the fund type; however, the conclusions vary with market scenarios. In addition, female investors prefer more dividend-paying funds than do male investors, but investing experience counteracts this difference. We also find that geographic location is a contributor when investors decide the fund type.

In this paper, we offer a new explanation regarding the specific contexts when CSR will have a positive impact on a firm’s market value. We argue that investors will value CSR positively if the firm-specific context implies that CSR is expected to create a market premium through the mechanisms of downside risk reduction or upside efficiency enhancement. Specifically, firms that have high financial risk or environmental risk are able to benefit from CSR as a risk mitigation strategy, and firms that have high earnings stability are able to benefit from CSR as an efficiency enhancement strategy. Using panel data for U.S. firms from 2002 to 2011, we show that CSR is beneficial to firm value when a firm faces high financial and/or environmental risk or has high earnings stability, whereas when a firm operates in a low-risk environment or has low earning stability, CSR is detrimental to firm value.

The purpose of this study is to test the free cash flow agency theory hypothesis; namely, (a) whether differences in industrial sector affect a company’s propensity to pay dividends, and (b) whether institutional ownership is able to substitute for the propensity to pay dividends as a bonding mechanism. The analysis uses logistic regression to explore the existence of institutional ownership as a substitute for paying cash dividends in companies belonging to different industrial sectors. The results show that companies in the manufacturing sector have a greater propensity to pay dividends compared to those in non-manufacturing sectors. The results also indicate that low institutional ownership, as an external monitoring mechanism, can substitute for increasing the propensity to pay dividends. Overall, the results are consistent with implications in dividend policy. The results support the notion that the propensity to pay dividends accommodates different behavioral factors, considering sectoral differences. In addition, the results illustrate the relevance of alternative theories in explaining dividend policy from the perspective of agency theory. The results show that sectoral comparisons, in addition to institutional ownership factors, play important roles in the propensity of Indonesian companies to pay dividends. This study shows that each industry sector has different income characteristics, which affect the differences in propensity to pay dividends.

Feedback trading strategies have gained much popularity among researchers in the last decades and are used to illustrate how new information based on returns is reflected in the markets. This paper extends previous studies by decomposing the overall return premium and introducing the global feedback trading model. The global feedback trading model assumes an interconnectedness between multiple countries and captures spillovers. Empirical results illustrate two important findings. First, feedback trading strategies differ across markets when distinguishing between day and night returns. Second, evidence for changing feedback trading is provided by examining the interaction of specific markets.

Increased share repurchase activity has raised renewed concerns as to whether the positive share price effect generally associated with share repurchase announcements is motivating companies to repurchase shares rather than to invest in future growth. This study focused on ascertaining the significant determinants of the choice between share repurchases and dividend payments to establish whether short-term share price manipulation affects the payout choice in South Africa. The significant determinants for the overall sample were shareholder heterogeneity, the size of the distribution and the level of company undervaluation. The significance of these variables were confirmed when disaggregating the data into sector and size categories. Additionally to this, the agency cost and history of dividend payment determinants were identified as significant determinants in the disaggregated analyses. Short-term share price manipulation was not found to be the driver of the payout choice.

Journal of International Money and Finance, Volume 92, 2019, pp. 98-111

This paper investigates the relation between financial flexibility and dividend smoothing policies. We use two proxies for financial flexibility; we measure levels of unused debt capacity and capital structure adjustment speeds. We find a nonlinear relation between unused debt capacity and dividend smoothing. For firms with high levels of unused debt capacity, this relation is positive. However, we find a negative effect for firms with low levels of unused debt capacity. Additionally, we show a positive relation between capital structure adjustment speeds and dividend smoothing. We find that firms absorb shocks to net income by changing their capital structure, and this change enables dividend smoothing. The effects we document are stronger for positive changes to a firm’s net income.

Journal of Financial Economics, Volume 119, Issue 1, 2016, pp. 168-185

We employ a regression discontinuity design to identify the real effects of share repurchases on other firm outcomes. The probability of share repurchases that increase earnings per share (EPS) is sharply higher for firms that would have just missed the EPS forecast in the absence of the repurchase, when compared with firms that “just beat” the EPS forecast. We use this discontinuity to show that EPS-motivated repurchases are associated with reductions in employment and investment, and a decrease in cash holdings. Our evidence suggests that managers are willing to trade off investments and employment for stock repurchases that allow them to meet analyst EPS forecasts.

Journal of Economics and Business, Volume 79, 2015, pp. 62-81

In this paper we develop a generalization of the Baker and Wurgler (2012) signaling model where investors are loss-averse to dividend cuts. We apply our framework to study how a firm's characteristics and manager's incentives affect payout policy properties. In equilibrium firms with riskier earnings are less likely to pay dividends, however, those that pay, payout more. Similarly, firms whose managers have a higher share of stock options in their compensation package are less likely to pay positive dividends. There is a clientele effect. Investors’ preferences and choices affect the payout policy and two otherwise identical firms can greatly differ in how they pay dividends. Finally, we relate our model's predictions to the disappearing dividend puzzle.

The International Journal of Accounting, Volume 48, Issue 4, 2013, pp. 427-458

One of the central puzzles of signaling theory is how to assess signal quality, in particular the potential for signal mimicking. Our study provides evidence of signal mimicking in the context of stock repurchases. Employing an ex-ante proxy for the likelihood of mimicking stock repurchases and data on open market stock repurchases from 30 countries, we find that long-term operating and market performance following stock repurchases improve less for suspected mimicking firms. This finding contradicts the conventional characterization that managers use stock repurchases to signal undervaluation and enhanced future performance. We find that mimicking firms have smaller capital investments, need greater external financing, buy back fewer shares, and issue more new shares (and/or resell more treasury shares) in the year of the repurchase. Our analysis further shows that mimicking is more likely in countries with weak investor protections and in firms with higher ownership concentration. Further, mimicking associated with concentrated ownership is mitigated in countries with stronger investor protections and by the adoption of International Financial Reporting Standards (IFRS). Altogether, our findings provide evidence of signal mimicking in stock repurchases in international data that is influenced by market, ownership, legal, and financial reporting characteristics of countries.

International Review of Financial Analysis, Volume 52, 2017, pp. 62-76

This study investigates the dual roles of institutional investors in earnings management during initial public offerings (IPOs). Research suggests that institutional investors play a monitoring role in the corporate governance of firms by mitigating earnings management to reduce agency problems. However, institutional investors have incentives to opportunistically maximize their wealth by manipulating earnings when firms engage in IPOs. Results suggest that institutional investors facilitate accrual-based earnings management before IPOs but restrain earnings management after their issuance. We also find that firms with high institutional ownership experience superior post-IPO stock returns and operating performance, thereby suggesting that the capital market positively prices the monitoring function of institutional investors after IPOs, and the performance of these firms is improved. Our results are robust to controlling the endogeneity problem of institutional investors and further identifying active institutional investors.

Journal of Corporate Finance, Volume 38, 2016, pp. 77-91

Prior research shows that companies repurchase stock during quarters with low returns, presumably because the stock is undervalued. We focus on repurchase increases and investigate another motive: Are repurchases increased to provide price support for a stock that, despite recent low returns, remains overvalued? Using an increase in short selling to indicate overvaluation, we regress quarterly changes in share repurchases on quarterly changes in short interest. Consistent with price support, the association is positive and statistically significant each year from 2003 to 2014. We find that the price support quarter is followed by a sharp multi-quarter decline in ROA (return on assets), but the corresponding decline in EPS (earnings per share) is modest due to the reduction in outstanding shares. Abnormal returns after the price support quarter are positive, indicating that price support is effective. We also examine trading by insiders. While insiders generally sell when shorts sell, they hold onto shares during the price support quarter. This indicates that insiders are confident that they can maintain the current stock price.