Capstone Assignment IB Finance Topic 2
Full course description
Are dividends and share repurchases substitutes?: Finance theory suggests that dividends and share repurchases are an equivalent way of distributing funds to shareholders. However, over the past 20 years share repurchase programs have become an important payout method for firms. Do these repurchases serve as substitutes for dividends? And if so, why has it taken so long to start to pay shareholders in a way that reduces their tax liability. In this capstone, review the available theoretical and empirical evidence in order to assess the evolution of dividend payments and repurchase programs. Pay special attention to the question of substitutability of dividends and share repurchases from the point of view of the corporation and the investor: Do firms finance share repurchases with funds that would otherwise have been used to pay dividends? Are investors indifferent between dividends and share repurchases? Do investors react differently to dividend than to share repurchase announcements? Why or why not? - In addition to the literature listed below, make sure that you review at least 3 additional articles of your own choice. For these, please provide correct references.
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- Allen, Bernardo and Welch (2000). A theory of dividends based on tax clientele. -Journal of Finance, 55 (6), 2499-2536.
- Fama and French (2001). Disappearing Dividends: Changing firm characteristics or lower propensity to pay? Journal of Financial Economics 60, 3-43.
- Skinner (2008). The evolving relation between earnings, dividends, and stock repurchases. Journal of Financial Economics 87, 582-609.
- von Eije and Megginson (2008). Dividends and share repurchases in the European Union. Journal of Financial Economics 89, 347-374.