Dividend Paying Firm And Flexibility Hypothesis

Previous research suggests that firms substitute stock repurchases for dividend increases in response to higher cash flow volatility and/or higher tax rates on dividends relative to capital gains. However, when the authors separately examine repurchase decisions by dividend and non-dividend paying firms, they find little evidence that either cash flow uncertainty or reduced dividend tax rates after the Tax Act of 2003 induces the expected shifts in payments. Instead, they find that the two payout methods appear to have distinctly different shareholder clientele rather than being substitutes for each other.