Economists have long been puzzled by why firms pay dividends when alternative methods of rewarding shareholders and financiers exist which involve less taxes. This paper will highlight the fact that firms can distribute cash to equity holders in ways more lightly taxed than dividends. The two methods we examine are share repurchase programs and cash-financed mergers and acquisitions. So why should cash distributions from firms to shareholders ever take the form of dividends? This paper first provides evidence on the explosive growth in dividend cash payments, and then discusses how this evidence should affect theories about corporate finance.

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This paper documents that firms face upward-sloping supply curves when they repurchase shares in a Dutch auction, and it analyzes the market reaction to these offers. The announcement price increase is highly correlated with the ultimate repurchase premium. Prices decline at expiration only for pro-rated offers. The cumulative return is positive and highly correlated with the repurchase premium, excepting pro-rated offers. Much of this price increase is consistent with movement along an upward-sloping supply curve. Trading volume around the Dutch auction parallels fixed-price repurchases. Supply elasticity is larger for firms with large trading volume, firms included in the S&P 500 Index, and takeover targets. THIS PAPER DOCUMENTSTHAT firms face upward-sloping supply curves when they repurchase shares in a Dutch auction. Until now, there has been little direct empirical assessment of the elasticity of the supply curve for corporate equity. At issue is whether or not the hypothesis of shareholder homogeneity of valuations, and therefore perfect supply elasticity, is a good approximation to actual markets. Both the advantages and limitations of assuming homogeneous valuations are highlighted in The Theory of Finance by Fama and Miller (1972), who in discussing the perfect capital market observed that no such market exists in the real world, nor could it. Rather, what we have here is an idealization ... permit(ing) us to focus more sharply on a limited number of aspects of the problem and usually greatly facilitat(ing) both the derivation and statement of the sought-for empirical generalizations. In the nature of the case, however, the generalizations so obtained can never be anything more than approximations to the real phenomena that they are supposed to represent. The question is whether, considered as approximations, they are close enough; and this, of course, is a question that can only be answered empirically and in light of the specific uses to which the approximations are put. (pp 21-22) *From the Department of Finance, Northwestern University. I would like to thankThe Journal of Finance This paper's provocative empirical findings imply that the hypothesis of homogeneous valuations is not a good approximation for understanding Dutch auction stock repurchases. I examine 32 Dutch auction stock repurchases which took place between 1981 and 1988. In a Dutch auction, the company states the number of shares it will buy during a stipulated period, and it sets a price range between which shareholder bids will be accepted. The repurchase price is the lowest price necessary to acquire the number of shares sought. Though not publicly available, I have obtained the individual shareholder bids in these auctions directly from the companies. Shareholder valuations are not homogeneous; rather, in each repurchase, the bids differ markedly across shareholders. This indicates that the repurchasing firms encounter upward-sloping supply curves for their shares. I then analyze the share price reaction to the repurchase. Prices in...

This paper documents that firms face upward‐sloping supply curves when they repurchase shares in a Dutch auction, and it analyzes the market reaction to these offers. The announcement price increase is highly correlated with the ultimate repurchase premium. Prices decline at expiration only for pro‐rated offers. The cumulative return is positive and highly correlated with the repurchase premium, excepting pro‐rated offers. Much of this price increase is consistent with movement along an upward‐sloping supply curve. Trading volume around the Dutch auction parallels fixed‐price repurchases. Supply elasticity is larger for firms with large trading volume, firms included in the S&P 500 Index, and takeover targets.

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