Financial flexibility and the choice between dividends and stock repurchases

This paper measures the growth in open market stock repurchases and the man ner in which stock repurchases and dividends are used by U.S. corporations. Stock repurchases and dividends are used at different times from one anoth er, by different kinds of firms. Stock repurchases are very pro-cyclical, w hile dividends increase steadily over time. Dividends are paid by firms wit h higher "permanent" operating cash flows, while repurchases are used by fi rms with higher "temporary", non-operating cash hows. Repurchasing firms al so have much more volatile cash flows and distributions. Finally, firms rep urchase stock following poor stock market performance and increase dividend s following good performance. These results are consistent with the view th at the flexibility inherent in repurchase programs is one reason why they a re sometimes used instead of dividends. (C) 2000 Elsevier Science S.A. All rights reserved. JEL classification: G32; G35.