One‐Time Cash Flow Announcements and Free Cash‐Flow Theory: Share Repurchases and Special Dividends

One‐Time Cash Flow Announcements and Free Cash‐Flow Theory: Share Repurchases and Special... ABSTRACT The leading explanation for the positive price response surrounding tender offer share repurchase and specially designated dividend (SDD) announcements is the information signaling hypothesis. This paper reexamines these announcements to determine if Jensen's free cash‐flow theory also has explanatory power. Lang and Litzenberger's (1989) findings suggest an important role for the free cash‐flow theory in explaining the market's reaction to dividend changes. In contrast, we find the market's reaction to share repurchases and SDDs is approximately the same for both high‐Q and low‐Q firms. We thus have an empirical puzzle: If Jensen's free cash‐flow theory applies to dividend changes, it is difficult to see why it does not also apply to the analogous events examined here. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

One‐Time Cash Flow Announcements and Free Cash‐Flow Theory: Share Repurchases and Special Dividends

The Journal of Finance, Volume 47 (5) – Dec 1, 1992

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Publisher
Wiley
Copyright
1992 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1992.tb04691.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT The leading explanation for the positive price response surrounding tender offer share repurchase and specially designated dividend (SDD) announcements is the information signaling hypothesis. This paper reexamines these announcements to determine if Jensen's free cash‐flow theory also has explanatory power. Lang and Litzenberger's (1989) findings suggest an important role for the free cash‐flow theory in explaining the market's reaction to dividend changes. In contrast, we find the market's reaction to share repurchases and SDDs is approximately the same for both high‐Q and low‐Q firms. We thus have an empirical puzzle: If Jensen's free cash‐flow theory applies to dividend changes, it is difficult to see why it does not also apply to the analogous events examined here.

Journal

The Journal of FinanceWiley

Published: Dec 1, 1992

References

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