REPURCHASE PREMIA AS A REASON FOR DIVIDENDS - A DYNAMIC-MODEL OF CORPORATE PAYOUT POLICIES

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.