An empirical model of choice of one-time corporate cash disbursement methods

Purpose – This paper aims to extend the work by Vafeas and Lie and Lie by developing an empirical model of choice among four alternative mechanisms for distributing cash from corporations to shareholders: a fixed-price self-tender offer, a Dutch auction self-tender offer, an open market share repurchase, and a special dividend. Design/methodology/approach – A multinomial logit (MNL) model adapted for choice-based sampling is used to examine the factors that influence a firm's choice among the four methods. Findings – Firms with a high degree of heterogeneity in shareholder valuations tend to select an open market repurchase, while firms with low levels of heterogeneity choose a special dividend. Firms already paying high dividends are more likely to issue a special dividend than institute an open market repurchase. A firm with poor stock performance prior to the announcement is more likely to choose a fixed-price self-tender offer or open market share repurchase. On the other hand, firms are more likely to follow strong performance with a special dividend. Contrary to Persons' model, it is found that firms facing a takeover threat are more likely to choose a fixed-price tender offer than a Dutch auction. Practical implications – It is shown that the ownership structure, current payout level; the size of the distribution, and the degree of stock undervaluation are among the most important determinants of a firm's choice among alternative payout methods. Originality/value – This study adds to the existing literature by developing the first empirical model of choice among all four one-time (or infrequent) corporate cash disbursement methods. It is also the first to adjust the MNL estimates for the choice-based sampling method used to collect the data.