Working Paper: CEPR ID: DP4813
Authors: Josmiguel Gaspar; Massimo Massa; Pedro Matos; Rajdeep Patgiri; Zahid Rehman
Abstract: We examine how shareholder investment horizons influence firms? payout decisions. We find that US firms held by short-term institutional investors have a higher propensity to buybacks shares instead of using dividends. Firm managers seem to respond to the preferred payout policy of investors in their shareholder base. Share buybacks are used by if managers want to appease short-term oriented shareholders, while firms pay dividends if their stock is mostly held by long-term investors who have less need to liquidate their investment and may have a better tax treatment with dividends. We document two effects of investor pressure: for firms initiating payouts through a share buyback we find that the market reaction is lower the more short-term investors are holding the firm?s stock, because such payout decisions are less well monitored; for firms that have already a payout policy at present, the market reacts more positively (and only temporarily) to a buyback in line with investor catering effects. Our findings help explain some of the puzzling recent findings relating the rise in institutional investment to a higher use of share buybacks.
Keywords: institutional investors; investment horizon; investor catering; payout policy; repurchases; shareholder heterogeneity; short-termism
JEL Codes: G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term investors (G14) | higher likelihood of share buybacks (G34) |
| short-term investors (G14) | less positive market reaction to share repurchase announcements (G34) |
| short-term investors (G14) | more favorable market reaction for increasing payouts (G35) |
| short-term investors (G14) | less monitoring of firms (G38) |
| monitoring from investors (G24) | payout choices of firms (G35) |
| investor preferences (G11) | managers cater to preferences (M54) |