B. Chowdhry et V. Nanda, REPURCHASE PREMIA AS A REASON FOR DIVIDENDS - A DYNAMIC-MODEL OF CORPORATE PAYOUT POLICIES, The Review of financial studies, 7(2), 1994, pp. 321-350
We propose that it is precisely because firms' repurchases of their ow
n stock through tender offers are associated with large stock-price in
creases that repurchases are unattractive as a means of distributing c
ash. As a result, firms distribute some cash in the form of dividend-d
espite the tax disadvantage-and carry the rest to future periods. Howe
ver, when their stock is sufficiently undervalued, firms distribute al
l accumulated cash through stock repurchases. We show that dividends a
re smoothed and are positively related both to earnings innovations an
d to previous period's dividends. Also, the stock-price reaction to a
repurchase announcement, of a given size, is increasing in the previou
s period's dividends.