SIGNALING WITH DIVIDENDS AND SHARE REPURCHASES - A CHOICE BETWEEN DETERMINISTIC AND STOCHASTIC CASH DISBURSEMENTS

We study firms signaling with cash disbursements and show that the cho ice of a deterministic or a stochastic disbursement depends on a prope rty of the firm's production function that is analogous to absolute ri sk aversion for a utility function. With decreasing (increasing) absol ute risk aversion, the high-quality firm prefers to distinguish itself from the low-quality firm with a stochastic (deterministic) outlay. W e then study in detail two common forms of corporate cash distribution s. dividends, a deterministic disbursement, and share repurchases, a s tochastic disbursement.