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The impact of a firm's payout policy on stock prices and shareholders' wealth in an inefficient market

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  • Nekat, Kai
  • Nippel, Peter
Abstract
In inefficient stock markets payout policy may be directly relevant for stock prices, not only by way of announcement effects considered in signaling games. We show that paying out free cash flow, either as a dividend or via repurchasing shares, has in general a positive price impact and increases shareholders' wealth, if the existence of non-smart investors and limits of arbitrage leads to market inefficiency. Shareholders gain more from a share repurchases instead of paying a dividend as long as capital gains are not heavily discriminated by taxation in relation to dividends. The positive price effect of dividends can be enhanced if the firm implements a dividend reinvestment plan (DRIP).

Suggested Citation

  • Nekat, Kai & Nippel, Peter, 2007. "The impact of a firm's payout policy on stock prices and shareholders' wealth in an inefficient market," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 619, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.
    • Handle: RePEc:zbw:cauman:619
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    File URL: https://www.econstor.eu/bitstream/10419/147672/1/manuskript_619.pdf
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    References listed on IDEAS

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    Cited by:

    1. Briskorn, Dirk & Knust, Sigrid, 2008. "On Circular 2-Factorizations of the Complete Tripartite Graph," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 636, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.

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    More about this item

    Keywords

    Payout policy; Dividends; Share Repurchases; Inefficient Market; Price Pressure; Dividend Reinvestment Plans (DRIPs);
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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