The cash-flow permanence and information content of dividend increases versus repurchases

We hypothesize that firms choose dividend increases to distribute relativel y permanent cash-flow shocks and repurchases to distribute more transient s hocks. As predicted, we find that post-shock cash flows of dividend increas ing firms exhibit less reversion to pre-shock levels compared with repurcha sing firms. We also examine whether the stock market uses the announcement of the payout method to update its beliefs about the permanence of cash-flo w shocks. Controlling for payout size and the market's expectation about th e permanence of the cash-flow shock, the stock price reaction to dividend i ncreases is more positive than the reaction to repurchases. (C) 2000 Elsevi er Science S.A. All rights reserved. JEL classification: G35; G32.