A Study of Payout Policies and Certain Underlying Decisive Factors with Regards to

Abstract

On March 10th 2000 a law was passed that enables Swedish companies to repurchase own shares. As a consequence of this several studies have examined dividends and repurchases, mainly focusing on their relation to share price development from an investor’s perspective. However, this thesis aims to establish an understanding of how companies’ payout policies have been affected with regards to dividends, thus we are performing this study from a company perspective. Our time-preiod is from 2000 - 2005, since the law was passed in 2000 and 2005 represents the last complete year. Furthermore we analyze certain characteristics concerning the repurchasing companies and compare them to a control portfolio, this was performed to examine why certain companies make repurchases and what some decisive factors are with regards to payout policies. To fulfil our purpose we stated four hypotheses, thus a significant amount of observations were collected with regards to dividends, repurchases, debt-to-equity ratios, profits and market valuations (market-to-book). These variables were then statistically tested and served as an operationalization of our hypotheses. From our analysis we can conclude that repurchases serves as complement to dividends and that many companies spend a large amount of capital on repurchases that could have been used to increase dividends. Further it is not statistically significant that repurchasing companies increase their dividends more than non-repurchasing companies even if a trend towards that direction is evident. Indications of a substitution effect are also discernable, since the propensity to increase dividends is lower and the propensity to decrease dividends is higher for the repurchasing companies. Furthermore, both repurchasing and non-repurchasing companies have changed their capital structure, measured as a debt-to-equity ratio, since 2000. Although, from our analysis, it is not possible to ascribe any differences in the development to repurchases. We can also conclude that it is statistically significant that repurchasing companies do have more volatile profits than non-repurchasing companies, which sheds light on the aspect of financial flexibility. Lastly, we find that repurchasing companies, all years except in 2000, are valued lower in the market relative to their book values in comparison to our control portfolio.