Why are both share repurchases and special dividends in use in the Swedish market: - An empirical study of the announcement effects

Abstract: Share repurchases were made legal in Sweden in March 2000. Since then, Swedish companies have been able to choose between share repurchases and special dividends for non-recurring distributions of excess capital. The purpose of this thesis is to determine why both methods are still in use. We identify three possible explanations: a) There is no difference in usefulness; the two methods are perfect substitutes. b) There is a difference in usefulness, but different companies have different opinions as to which method would be preferred. Some use the correct method, the others would be better off using the other method. c) The usefulness of either method is contingent on company characteristics. For some companies, special dividends is the preferred method, others are better off using repurchases. We use empirical tests where usefulness is approximated into announcement effects in order to determine which explanation that is correct. These tests consist of an event study, a logistic regression and two multivariate regressions and are based on announcements of either redistribution method in the period of January 2000 – March 2006 as well as accounting and financial data. This data is used in order to stipulate a decision model, based on the majority choice given certain company characteristics. We find no significant difference in announcement effect between share repurchases and special dividends, but a significant difference between the firms who have followed the decision model and those who have not. We thus conclude that our third explanation is correct: The usefulness of either method is contingent on company characteristics. For some companies, special dividends is the preferred method, others are better off using repurchases.