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One‐Time Cash Flow Announcements and Free Cash‐Flow Theory: Share Repurchases and Special Dividends
Author(s) -
HOWE KEITH M.,
HE JIA,
KAO G. WENCHI
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb04691.x
Subject(s) - free cash flow , dividend , cash flow , economics , dividend policy , monetary economics , financial economics , explanatory power , cash flow statement , econometrics , business , finance , philosophy , epistemology
The leading explanation for the positive price response surrounding tender offer share repurchase and specially designated dividend (SDD) announcements is the information signaling hypothesis. This paper reexamines these announcements to determine if Jensen's free cash‐flow theory also has explanatory power. Lang and Litzenberger's (1989) findings suggest an important role for the free cash‐flow theory in explaining the market's reaction to dividend changes. In contrast, we find the market's reaction to share repurchases and SDDs is approximately the same for both high‐Q and low‐Q firms. We thus have an empirical puzzle: If Jensen's free cash‐flow theory applies to dividend changes, it is difficult to see why it does not also apply to the analogous events examined here.
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