An empirical model of choice of one‐time corporate cash disbursement methods

Abstract

PurposeThis paper aims to extend the work by Vafeas and Lie and Lie by developing an empirical model of choice among four alternative mechanisms for distributing cash from corporations to shareholders: a fixed‐price self‐tender offer, a Dutch auction self‐tender offer, an open market share repurchase, and a special dividend.Design/methodology/approachA multinomial logit (MNL) model adapted for choice‐based sampling is used to examine the factors that influence a firm's choice among the four methods.FindingsFirms with a high degree of heterogeneity in shareholder valuations tend to select an open market repurchase, while firms with low levels of heterogeneity choose a special dividend. Firms already paying high dividends are more likely to issue a special dividend than institute an open market repurchase. A firm with poor stock performance prior to the announcement is more likely to choose a fixed‐price self‐tender offer or open market share repurchase. On the other hand, firms are more likely to follow strong performance with a special dividend. Contrary to Persons' model, it is found that firms facing a takeover threat are more likely to choose a fixed‐price tender offer than a Dutch auction.Practical implicationsIt is shown that the ownership structure, current payout level; the size of the distribution, and the degree of stock undervaluation are among the most important determinants of a firm's choice among alternative payout methods.Originality/valueThis study adds to the existing literature by developing the first empirical model of choice among all four one‐time (or infrequent) corporate cash disbursement methods. It is also the first to adjust the MNL estimates for the choice‐based sampling method used to collect the data.

Determinants of payout choice between open market repurchase, tender offer repurchase and special dividends

“…The ordered logistic model cannot be used since the dependent variable is not in order. Caudill et al (2006) made the first use of MNL adjusted for choice-based sampling.…”

“…LSIZE is the market value of the firm prior to the announcement date taken from CMIE Prowess. A similar calculation has been used by Caudill et al (2006). INSTOWN is the ratio of shares held by institutional investors by the total number of shares held at the end of the year prior to the announcement.…”

Determinants of the choice of share buyback methods: A study in India

“…Lie and Lie (1999) report that firms with a low dividend yield are more likely to choose tender method for share buyback. Caudill et al (2006) report that firms paying higher dividend are more likely to pay special dividend rather than initiate open market share repurchase. So the selection of repurchase methods may depend on dividend yield or payment of higher dividend.…”

Corporate Restructuring through Share buybacks: An Indian Experience

“…(iii) Dividend Substitution: Buybacks and dividends are payout mechanisms to return the excess cash to the shareholders. The choice between dividends and buybacks depend on the ownership structure, the current payout levels, the size of the distribution and degree of under-valuation (Caudill, Marshall, & Roumantzi, 2006). (iv)…”

“…(vi) Other popular reasons : Take over deterrence can be achieved if a buyback is announced prior to the takeover, since buyback has been witnessed to increase the earnings per share(EPS), CEO compensation driven buyback programs have been frequently talked about since the CEO compensation is linked to the share price which can see a boost post the buyback announcement. Caudill, Marshall, and Roumantzi, (2006) compare the choice by companies amongst fixed price tender offer, Dutch auction, open market repurchases and special dividends and find that the choices amongst the payout techniques depend on factors like the size of the firm, institutional ownership, leverage, dividend yield, undervaluation and takeover threats. Hence there is a need to segregate a different set of drivers for open market repurchase and tender offer repurchase in the Indian scenario as well.…”