payout policies Flashcards
what are the types of share repurchases
open market repurchase
tender offer
targeted repurchase
what are the three dividend policies
dividend, share repurchase and high dividend paid by equity issue
what is the dividend puzzle
why do firms pay dividends despite their tax disadvantage
what determinants determine the tax difference of investors
the type of investor
the tax jurisdiction
the investment horizon
the income level
explain clientele effect
the idea that firms adapt their dividend policy according to the tax preference of its investor clientele. There must be a equilibrium between the demand for dividends and the supply for dividends
what is the dividend capture theory
is linked with the clientele effect, it suggests that investors will trade stocks around the ex-dividend date, where investors that don’t want a dividend will sell to investors that do, and after the ex-dividend date the reverse will happen.
in payout vs retaining cash, what are the 2 types of taxes of importance
corporate tax
taxes paid by the shareholders
why would firms want to retain cash despite the tax disadvantage
- future earnings might be insufficient to finance future positive npv projects
- it decreases transaction, agency and adverse selection costs of raising new capital through debt or equity issues
- it lowers financial distress costs
what are the 2 systems of taxing foreign income and what do they imply
source based system
residence based system –> you better keep the cash in the foreign subsidiary
what is the dividend signalling hypothesis
changes in dividends reflect the managers’ views about the firm’s future earnings prospects
an increase can send a message that it can afford higher dividends, however it can als mean that they did not invest enough
a decrease can lead to a negative reaction but also a positive one because it means that the firm needs this money to exploit new pos NPV projects
