Why would firms choose dividends over share repurchases?

Abstract: This study investigates the relationship between the two different payout policies, dividends and share repurchases, and firm value in the Swedish market. We aim to clarify how the lack of difference in taxation of dividends and capital gains in Sweden affects investors’ preferences for different payout policies and whether a certain payout policy incentivizes investor to pay extra for a firm that applies this policy. The study is performed through a panel regression on Swedish firms for the period 1987-2017. Market to book value is used as a proxy for firm value. The market to book value is defined in two different ways; market value over book value of asset and market value over book value of equity. To capture the most accurate relationships, several different regressions are defined. The sample is also divided into sub-periods in order to test for the robustness of the results. The results show a significantly positive relationship between firm value and dividends. This implies that investors value dividend-paying firms higher than non-paying firms and are willing to pay extra for dividend-paying firms. Furthermore, no significant relationship could be found between firm value and share repurchase, implying that investors, in general, do not consider a repurchasing firm more or less valuable than a non-repurchasing firm. It can, therefore, be concluded that when the tax effect is removed, the significance of share repurchases is diminished while dividends still have a value-adding effect on firm value. However, looking at the evolution of the relationship between firm value and the two payout policies over time, it can be seen that the significance of share repurchases increases in the last three years of a sample period. Three possible explanations are presented to this change: an increase in investor protection, the financial crisis, and the shareholder heterogeneity. The availability of data for share repurchases in Swedish firms is low and a limiting factor in this study. Few studies have been on this topic for the Swedish market and further research would, therefore, be desirable to confirm the implications of this study.