The dividend and share repurchase policies of Canadian firms: Empirical evidence based on an alternative research design

We empirically investigate dividend and share repurchase policies of Canadian firms. Our analysis contains two features that are uncommon in finance, while they are encountered in other fields of science. First, we use standard, simultaneous, and nested logit models. By examining different model specifications, we test alternative descriptions of the behavior of decision makers. Second, we use questionnaire data on firm characteristics. We have sent a questionnaire to the 500 largest nonfinancial Canadian companies listed on the Toronto Stock Exchange, of which 191 usable responses were returned. Our results are consistent with a structure in which the company first decides whether it wants to pay out cash to its shareholders or not. In the second stage, the firm decides on the form of the payout: dividends, share repurchases, or both. Payout is determined by free cash flow. The choice for dividends and repurchases depends on behavioral and tax preferences. Furthermore, the payout is less likely to be dividends if the company has executive stock option plans. Finally, we find evidence for the Brennan and Thakor [J. Finance (1990)] model. According to this model, the existence of asymmetric information amongst outsiders is associated with a preference for dividend payments over share repurchases.

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