A Unifying Approach for Comparing One-time Payouts and Recurring Dividends

This paper examines the market responses to four cash payout methods: regular dividend increases, special dividends, tender-offer repurchases and open market repurchases. We also investigate the reasons why firms choose one payout form over another. We use relative, and discounted relative, residuals as the unifying concepts whereby the market reaction is related to payout magnitude and likely recurrence as need be. With these measures, the responses to one-time payouts and recurring dividends can be directly compared and integrated for testing purposes. Our results show that various forms of payouts can be equally effective provided the form is properly chosen, repurchases being more efficient for erasing larger stock undervaluation whereas dividends will best be chosen for mitigating agency problem