Distributing excess cash
the role of specially designated dividends
DOI:
https://doi.org/10.61190/fsr.v14i2.4820Keywords:
Share repurchases, Specially designated dividends, Payout policy, DividendsAbstract
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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