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Unformatted text preview: perfections, a cash dividend and a share repurchase are essentially the same A shareholder with 100 shares can sell 30 shares and end up with $300 in cash and $ 700 in stock as before Establishing a Dividend Policy 8 Lintner’s (1956) Stylized Facts: Firms have longer term target dividend payout ratios. Managers focus more on dividend changes than on absolute levels. Dividends changes follow shifts in long‐run, sustainable levels of earnings rather than short‐run changes in earnings. Managers are reluctant to make dividend changes that might have to be reversed. Establishing a Dividend Policy 9 Residual Dividend Approach New issues are costly. The firm wants to minimize the need to sell equity; and/or Assume the firm wants to maintain it current capital structure. The firm will only pay dividends from whatever is leftover after cash has been invested in positive NPV projects. Establishing a Dividend Policy 10 Residual Dividend Approach Firms with a lot of reinvestment opportunities will reinvest and pay...
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