Distributing excess cash

the role of specially designated dividends

Authors

  • H. Kent Baker Department of Finance, and Real Estate, Kogod School of Business, American University
  • Tarun K. Mukherjee Department of Economics and Finance, University of New Orleans
  • Gary E. Powell Department of Finance, Towson University, College of Business and Economics, Towson

DOI:

https://doi.org/10.61190/fsr.v14i2.4820

Keywords:

Share repurchases, Specially designated dividends, Payout policy, Dividends

Abstract

Investors can receive cash distributions from corporations through share repurchases, regular cash dividends, and specially designated dividends (SDDs). Understanding why firms choose one method over another to distribute excess cash has important implications for investors. We find that the primary motive for repurchasing shares is to take advantage of perceived market undervaluation of the firm's shares. Having strong earnings and cash flows provide an impetus for both regular dividends increases and SDDs, but investors should view any increase in yield resulting from SDDs as temporary. They should interpret SDDs as conveying positive information about current excess performance, not long-run performance.

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Published

2005-06-30

Issue

Vol. 14 No. 2 (2005): FSR Summer 2005

Section

New Original Submission

License

Copyright (c) 2005 Academy of Financial Services

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How to Cite

Distributing excess cash: the role of specially designated dividends. (2005). Financial Services Review, 14(2), 111-131. https://doi.org/10.61190/fsr.v14i2.4820