Herskovits, Jean;
Muhle-Karbe, Johannes;
Tse, Alex SL;
(2025)
The (Non-)Equivalence of Dividends and Share Buybacks.
Mathematics and Financial Economics
10.1007/s11579-025-00396-0.
(In press).
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Abstract
We study a one-period equilibrium model in which a firm optimally determines its equity distribution level to maximize the expected utility of a representative shareholder. Dividends and share buybacks, the two most prevalent payout methods, are compared and contrasted. In our baseline setup, we demonstrate a Modigliani-Miller-style equivalence, where both dividend payouts and share buybacks result in the same shareholder welfare, distribution ratio and firm’s investment level. However, share buybacks lead to a higher firm price in equilibrium. This conclusion is robust to alternative modeling specifications, such as heterogeneous beliefs among investors and endogenous riskfree rates. We also provide examples where this equivalence breaks down due to distortions in managerial incentives or market frictions. For example, firm managers endowed with employee stock options strictly prefer buybacks over dividends. In the presence of trading constraints, the relative attractiveness of dividends versus buybacks becomes ambiguous.
| Type: | Article |
|---|---|
| Title: | The (Non-)Equivalence of Dividends and Share Buybacks |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1007/s11579-025-00396-0 |
| Publisher version: | https://doi.org/10.1007/s11579-025-00396-0 |
| Language: | English |
| Additional information: | This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/. |
| Keywords: | Dividends; share buybacks; equilibrium |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10210819 |
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