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Signaling with Dividends and Share Repurchases: A Choice between Deterministic and Stochastic Cash Disbursements

Donald B. Hausch¹; James K. Seward^2,3

¹ University of Wisconsin–Madison · ² Dartmouth Hospital · ³ Dartmouth College

We study firms signaling with cash disbursements and show that the choice of a deterministic or a stochastic disbursement depends on a property of the firm’s production function that is analogous to absolute risk aversion for a utility function. With decreasing (increasing) absolute risk aversion, the high-quality firm prefers to distinguish itself from the low-quality firm with a stochastic (deterministic) outlay. We then study in detail two common forms of corporate cash distributions: dividends, a deterministic disbursement, and share repurchases, a stochastic disbursement.

DOI

10.1093/rfs/6.1.121

Volume

6 (1)

Pages

121-154

Language

en

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BibTeX

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