Extract
The impact of the special dividend announcement on the stock return: the case of Malaysia.
INTRODUCTION
The amount of dividend that a firm should pay to its stockholders is usually determined through dividend policy of the firm. There are three alternatives available to managers for distributing excess cash to shareholders. A firm could choose to initiate or increase dividends, repurchase shares, or pay a special dividend. The selection of the each of the above alternative will depend on expected future cash flows and the firm's prior share price performance. Jagannathan, et al. (2000) finds that dividends are initiated or increased following "permanent" increases in cash flows. If the current cash flow level does not appear sustainable, a firm is unlikely to initiate or increase dividend levels because of the negative consequences that would occur if it were subsequently forced to decrease or suspend the dividend. Stephens and Weisbach (1999) and Jagannathan et al. (2000) find that firms are more likely to repurchase stock following a period of poor stock performance. Therefore, a firm would be reluctant to use share repurchase as a means of distributing excess cash following a significant run-up in the share price. As such, firms choose special dividends as a means of distributing cash in a setting characterized by temporary increases in cash flows and prior positive share price performance. Special dividends have salient characteristics that make them a better choice in distributing the excess cash in comparison to the regular dividend and cash repurchase. The decision to issue a special dividend reduces the free cash flow problems by...See the full content of this document
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