Payout Policy Choices and Shareholder Investment Horizons

Transcription

1 Payou Polcy Choces and Shareholder Invesmen Horzons José-Mguel Gaspar* Massmo Massa** Pedro Maos*** Rajdeep Pagr Zahd Rehman Absrac Ths paper examnes how shareholder nvesmen horzons nfluence payou polcy choces. We nfer nsuonal shareholders' nvesmen horzons usng he churn rae of her overall sock porfolos pror o he payou decson. We fnd ha he frequency and amoun of repurchases ncreases wh ownershp by shor-erm nvesors, o he dermen of dvdends. We also fnd ha he marke reacs less posvely o repurchase announcemens made by frms held by shor-erm nsuons. These fndngs are conssen wh a model n whch undervalued frms sgnal her value hrough repurchases, bu frms held by shor-erm nvesors make repurchases more ofen because hose nvesors care mosly abou he shor-erm prce reacon. Hence he marke raonally dscouns he sgnal provded by such repurchases. Our fndngs sugges ha shorer shareholder nvesmen horzons mgh be one conrbung facor o he ncreasng populary of buybacks. JEL Classfcaon: Keywords: G35; G32 payou polcy; repurchases; nsuonal nvesors; nvesmen horzon; shareholder heerogeney. ESSEC Busness School. *INSEAD. ***Darden School of Busness, Unversy of Vrgna. BlackRock. Correspondng auhor: José-Mguel Gaspar, ESSEC Busness School, Avenue Bernard Hrsch, Cergy- Ponose, France. Tel.: Fax: Emal: [email protected]. We hank Yanv Grnsen, Yuano Kusnad, Urs Peyer, Theo Vermaelen, Jeffrey Wurgler and semnar parcpans n he AFA 2005 meengs, he EFA 2005 meengs, Boson College, Roerdam School of Managemen, and Tlburg Unversy for her commens. Pedro and José-Mguel kndly acknowledge he fnancal suppor of Fundação para a Cênca e Tecnologa and Zahd ha of he Insue of Inernaonal Fnance.

2 Payou Polcy Choces and Shareholder Invesmen Horzons Absrac Ths paper examnes how shareholder nvesmen horzons nfluence payou polcy choces. We nfer nsuonal shareholders' nvesmen horzons usng he churn rae of her overall sock porfolos pror o he payou decson. We fnd ha he frequency and amoun of repurchases ncreases wh ownershp by shor-erm nvesors, o he dermen of dvdends. We also fnd ha he marke reacs less posvely o repurchase announcemens made by frms held by shor-erm nsuons. These fndngs are conssen wh a model n whch undervalued frms sgnal her value hrough repurchases, bu frms held by shor-erm nvesors make repurchases more ofen because hose nvesors care mosly abou he shor-erm prce reacon. Hence he marke raonally dscouns he sgnal provded by such repurchases. Our fndngs sugges ha shorer shareholder nvesmen horzons mgh be one conrbung facor o he ncreasng populary of buybacks. JEL Classfcaon: Keywords: G35; G32 payou polcy; repurchases; nsuonal nvesors; nvesmen horzon; shareholder heerogeney. 1

3 1. Inroducon Over he las hree decades, share repurchase acvy has experenced exraordnary growh. Repurchases are now an mporan form of payou of U.S. frms, and he long-erm rend n payou choces pons oward a lower proporon of frms payng dvdends and replacng hem wh repurchases (Fama and French, 2001; Grullon and Mchaely, 2002; Julo and Ikenberry, 2004). These major shfs n payou polcy occurred concurrenly wh he rse of nsuonal ownershp. The percenage of equy ownershp held by nsuonal nvesors now represens over 70% of frm s oal equy, up from 24% n 1980 (Gompers and Merck, 2001; Gllan and Sarks, 2007). Insuonal nvesors are far from an homogeneous group (e.g. Hochkss and Srckland, 2003). In parcular, money managers dffer n erms of her nvesmen horzon, ha s, he expeced lengh of me ha an nvesor holds a sock n hs porfolo. Some nsuons have a shor-erm focus, acng as speculaors, whle ohers are more long-erm orened, behavng as "acvss (Gllan and Sarks, 2007). Moreover, he average nvesmen horzon has changed over me. For example, Bogle (2003) repors ha muual fund managers currenly hold a sock n her porfolo for an average holdng perod of approxmaely one year, versus sx years n he early 1970s. 1 Ths paper sudes how he nvesmen horzon of a frm s shareholders affecs he choce of payou mehod. Our esable hypoheses are based on a sgnalng model of he payou choce by Lucas and McDonald (1998). Alhough he evdence on he emprcal performance of sgnalng models s mxed (see Allen and Mchaely (2003) for a crcal revew), he model has he advanage of offerng clear-cu predcons of he mpac of shareholder nvesmen horzons on payou choces. 2 In Lucas and McDonald (1998), prvaely-nformed managers (whose neress are algned wh shareholders) mus decde how o dsrbue excess cash. 3 Invesors updae her belefs abou he value of asses n place by observng he frm s payou decson,.e. he proporon of he cash pad hrough a dvdend or a repurchase. The auhors show ha managers decdng whch payou mechansm o use face wo oppose forces. On he one hand, payng cash hrough a dvdend s cosly because dvdend ncome ax raes are assumed o be hgher han capal gans ax raes. On he oher hand, payng cash hrough a repurchase mgh generae a wealh ransfer o sellng shareholders from non-sellng shareholders (ha say wh he frm afer he buyback) f he repurchase prce s oo hgh. Managers mus herefore rade-off he ax cos of a dvdend agans he poenal dluon cos of a repurchase. 1 The shor-erm naure of nsuonal nvesors s sressed n Sen (1989), Porer (1992), and Froo, Perold and Sen (1992). 2 Oher sgnalng models of he choce beween dvdends and repurchases nclude Ofer and Thakor (1987) and Brennan and Thakor (1990). In Chowdry and Nanda (1994), frms can also choose o sore cash. 3 The amoun of cash o be dsrbued, lef-over afer all posve NPV opporunes are exhaused, s common knowledge. Ths movaes our choce o look a frms wh posve payous n our ess (see below). 2

4 Lucas and McDonald (1998) show ha a sgnalng equlbrum exss n whch relavely more undervalued frms sgnal her value o he marke by payng a larger proporon of her cash hrough repurchases. Ths equlbrum s suppored as follows. In he absence of axes an overvalued frm wh only long-erm shareholders wll never repurchase s own shares (snce managers always ac n he shareholders bes neres). The marke hus nerpres a repurchase unambguously as good news, bddng he frm's prce up. In he presence of axes he frms wll separae. Hgh qualy frms choose o repurchase relavely more because her poenal dluon coss are much smaller. Low qualy frms pay cosly dvdends bu dong so saves hem an even larger dluon cos. Hence along he equlbrum schedule he marke ncreases s esmae of he frm's value n drec relaon wh he amoun of repurchases. The model's man nsgh of neres o us s ha he rade-off faced by managers depends on he nvesmen horzon of shareholders. Non-sellng (long-erm) shareholders face he dluon cos descrbed earler. Sellng (shor-erm) shareholders benef from he non-negave prce reacon o a repurchase announcemen and save on axes, so hey unambguously prefer managers o make a repurchase. 4 Managers, who decde on he payou choce, are assumed o ac accordng o he preferences of he shareholders. As he fracon of ownershp by shor-erm shareholders ncreases, he wegh of he dluon coss (borne by long-erm shareholders) n he manager s uly funcon decreases, and managers opmally choose o perform a larger amoun of repurchases. However he marke recognzes such repurchases as a less credble sgnal of frm undervaluaon, and arbues a proporonally lower valuaon ncrease (gven a smlar-szed repurchase) o a frm domnaed by shor-erm nvesors relave o a frm domnaed by long-erm nvesors. The model hus offers esable predcons concernng he relaon beween shareholder nvesmen horzons and payou choce. The frs predcon s ha he proporon of cash pad hrough repurchases should be assocaed wh shorer shareholder nvesmen horzons. The second predcon s ha he lkelhood of usng repurchases should be posvely assocaed wh shorer shareholder nvesmen horzons. The hrd predcon s ha he marke reacon o a repurchase announcemen should be negavely assocaed wh shorer shareholder nvesmen horzons. An addonal falsfcaon es s ha hese effecs should be sronger for frms characerzed by hgher nformaon asymmeres, because for hose frms dluon coss are parcularly mporan. As usual, our underlyng null hypohess s ha n perfec capal markes nvesmen horzon should no maer because arbrage hrough home-made dvdends makes payou polcy rrelevan (Mller and Modglan, 1961). 4 Shareholders who parcpae pro-raa n he repurchase wll also srcly prefer repurchases o dvdends because hey are ndfferen o he repurchase prce bu prefer o save he dvdend axes. Noe ha, for he equlbrum o hold, he percenage of sellng shareholders mus be bounded from above (Lucas and McDonald, 1998). 3

5 The avalably of daa on nsuonal holdngs provdes an unque opporuny o nfer he nvesmen horzon of shareholders. We characerze each nsuonal shareholder s nvesmen horzon by lookng a he average urnover level of s porfolo,.e. he rao of dollar purchases and sales o he dollar value of he porfolo (Gaspar, Massa and Maos, 2005). We aggregae whn each frm o ge he average porfolo urnover rae of all nsuonal nvesors n each frm s ownershp srucure. We use hs proxy, whch we call Invesor Turnover, o sudy how nvesmen horzons affecs payou polcy choces and he marke reacon o repurchase announcemens. Besdes ssues of daa avalably, he use of nsuonal shareholdngs o es he model can be jusfed on he grounds ha nsuons usually hold szable sakes and are less lkely o suffer from coordnaon problems (e.g. Shlefer and Vshny, 1986). Our emprcal analyss uses a sample of publc U.S. non-fnancal frms wh posve payous n any gven year for he perod 1984 o Our resuls show ha frms whose ownershp srucures are characerzed by more shor-erm orened nvesors use a hgher proporon of repurchases n her payous. If nsuonal nvesors hold on o her nvesmens for 5 monhs less han he average of 27 monhs n our sample (.e. one sandard devaon n Invesor Turnover), he share of repurchases n oal payou ncreases by 9.5% (a 26% relave ncrease) and he probably of he frm makng a repurchase nsead of augmenng he dvdend s rased by 2.5% (a 5% relave ncrease). We also fnd ha he marke reacon o a sock repurchase announcemen decreases wh nvesors horzons. An ncrease of Invesor Turnover of one sandard devaon reduces he cumulave abnormal reurn around he announcemen dae by 27 bass pons, a 14 percen change relave o he average 2.0% gan n our sample of repurchase announcemens. Frms characerzed by sronger nformaon asymmery (larger analys forecas errors and larger analys forecas dsperson) exhb sronger paerns. Our resuls sll hold when we look a he level (raher han he composon) of payou, and when we adjus our esmaes for poenal self-selecon ssues. Usng a dynamc panel daa esmaor, we also fnd ha reverse causaly does no seem o be drvng our resuls. Alhough our analyss focuses on frms ha make dsrbuons, n he las secon of he paper we offer some resuls for he exended sample ha ncludes non-payng frms. We fnd ha he presence of shor-erm nvesors s assocaed wh makng a repurchase, uncondonally n any gven year or for he frs me n he frm's hsory. A he same me, ownershp by shor-erm shareholders decreases he probably of a dvdend paymen. In conras, long-erm nvesors are assocaed wh posve payous, boh n he form of repurchases and dvdends (hough more srongly n he case of dvdends). Ths s conssen wh he noon ha long-erm nvesors have monorng ables and lead frms o ncrease payous, rrespecve of he form ha hese dsrbuons ake. Our paper conrbues o he growng leraure on he mpac of shareholder nvesmen horzons on corporae polcy and more drecly on he relaon beween nsuonal ownershp and 4

6 dvdend polcy. 5,6 We show ha nvesmen horzon s a relevan dmenson of shareholder heerogeney wh mplcaons for payou polcy. Our resuls herefore qualfy and complemen hose of Grnsen and Mchaely (2005), whose ess nvolvng he level of nsuonal ownershp fal o repor a sgnfcan mpac of ownershp srucure on payou paerns. Fnally, our fndngs sugges ha shorer shareholder nvesmen horzons mgh be one conrbung facor o he long-erm rend of an ncreasng use of share repurchases by U.S. corporaons, o he dermen of dvdends (Fama and French, 2001; Grullon and Mchaely, 2002). A paper close o ours s Hovamakan and L (2010), who repor ha ownershp by long-erm nvesors s assocaed wh hgher payous, whle for payers here s a srong assocaon beween on one hand, shor-erm nvesors and repurchases, and, on he oher hand, long-erm nvesors and dvdends. The auhors nerpre her fndngs as conssen wh monorng by long-erm nvesors and wh he noon ha shor-erm nvesors are beer nformed and hus prefer ha frms make repurchases (Brennan and Thakor, 1990). Alhough mos of our resuls concur, our paper dffers from hers by ncludng he analyses of he marke reacon o repurchase announcemens and of he exsence of reverse causaly. We also nerpre he resuls dfferenly, as wll be argued n he dscusson secon. Our paper akes he varaon n shareholders' nvesmen horzons as exogenous. We are agnosc concernng he reasons why nvesors have heerogeneous holdng horzons, whch nclude: dfferences n he demographcs and lqudy needs of he fnal owners of he nsuonal porfolos (Edelen, 1999); he dsored ncenves nduced by delegaed asse managemen (Scharfsen and Sen, 1990; Allen and Goron, 1993; Dow and Goron, 1997; Goldman and Slezak, 2003); he nably o connuously gaher fresh capal o mplemen long-erm sraeges (Shlefer and Vshny, 1997); or varaons n rsk-averson of agens ryng o rade on long-erm nformaon (Holden and Subrahmanyam, 1996). The remander of he paper s organzed as follows. Secon 2 descrbes he daa and he mehodology we use. Secon 3 analyzes he mpac of nvesmen horzons on he choce of payou 5 Ownershp by shor-erm orened nsuons has been lnked o R&D cus when earnngs fall (Bushee, 1998), hgher sock prce volaly (Bushee and Noe, 2000), greaer sock lqudy (Bushee, 2001), less frequen bu hgher-qualy merger and acqusons (Gaspar, Massa and Maos, 2005; Chen, Harford, and L, 2007), lower accruals qualy (Lu and Peng, 2006), lower cred rangs and hgher cred spreads (Elyasan, Ja and Mao, 2006), greaer sensvy of CEO compensaon o negave performance (Shn, 2008), hgher capal expendures (Cella, 2009), hgher momenum reurns and subsequen reurns reversal (Cremers and Pareek, 2010), and greaer amplfcaon of marke-wde negave shocks (Cella, Ellul and Ganne, 2010). Derren, Kecskés and Thesmar (2009) argue ha he mpac of shareholder nvesmen horzons s nduced by marke neffcency. Yan and Zhang (2009) repor ha shor-erm nvesors are able o predc shor-erm nformaon and prof from hrough her rades. 6 Del Guerco (1996) sudes he role of dvdends n nsuons porfolo selecon. Hochkss and Lawrence (2003) provde evdence n favor of dvdend cleneles whn nsuonal nvesors. Grnsen and Mchaely (2005) repor ha nsuons do no seem o cause changes n payou and exhb a preference for repurchasers among frms wh posve payous. Amhud and L (2006) show ha he declnng nformaon conen of dvdend announcemens s lnked o ncreased ownershp by nsuons. 5

7 polcy and he marke reacon o repurchase announcemens. Secon 4 presens several robusness checks. Secon 5 nvesgaes he mpac of nvesmen horzons n he sample ha ncludes nonpayng frms. Secon 6 dscusses our fndngs n he lgh of possble alernave explanaons. A bref concluson follows. 2. Daa And Emprcal Tesng Issues 2.1. Sample Consrucon Our man daa source s he CRSP-COMPUSTAT Merged daabase conanng frm-level annual daa on dollar payous for US lsed frms durng he perod We exclude regulaed ules, fnancal frms, and secures oher han common sock. Followng Ikenberry, Lakonshok and Vermaelen (1995) and Grullon and Mchaely (2002), we exclude he year 1987 due o he exceponal naure of he repurchases made afer he crash of Ocober We requre ha frms repor a posve payou, ha s, a dvdend, a repurchase, or boh. We exrac announcemen daes for open marke repurchase programs from he Secures Daa Corporaon (SDC) daabase. Followng Jagannahan e al. (2000), we use hs nformaon o adjus he COMPUSTAT dollar amoun of repurchases by keepng repurchase values only for hose years n whch here s an announcemen n SDC n ha year or n one of he prevous wo years (we also exclude announcemens made n he las quarer of 1987). From he CRSP Monhly Socks even fle of dvdend announcemens, we keep all evens wh CRSP declaraon codes equal o 1232 (ordnary quarerly dvdends) wh non-mssng declaraon daes. Followng Amhud and L (2006), we ake only hose frms wh dvdend ncreases where he change n he dvdend per share amoun s a leas 0.5%. Moreover, we requre ha, for each frm-year, we have daa on all our man explanaory varables Measurng Shareholders' Invesmen Horzons Informaon on porfolo holdngs of nsuonal nvesors s avalable from he ThomsonReuers Specrum 13F daabase, whch consss of quarerly holdngs flngs of qualfed money managers o he Secures and Exchange Commsson (e.g. Gompers and Merck, 2001). The daase conans he posons of more han 10,000 shares or US$200,000 n value of all nsuons wh more han US$100 mllon dollars under dscreonary managemen. Our man varable of neres s Invesor Turnover, a measure of he nvesmen horzon of nsuons holdng a sake n he frm pror o a dsrbuon announcemen (Gaspar, Massa and Maos, 6

8 2005). The raonale behnd hs measure s ha an nvesor can be consdered shor-erm f churns s overall porfolo frequenly. Inversely, an nvesor can be consdered long-erm f holds s sock posons unchanged for a consderable lengh of me. Havng characerzed each nvesor wh posve holdngs whn a frm's shareholdng srucure, we can hen characerze frms based on her average shareholder profle n erms of nvesmen horzon pror o he payou. To calculae Invesor Turnover we use he followng procedure. Denoe by Q he se of companes held by nvesor a me. The urnover rae of nvesor a me s TR, Q k1 N k,, Q P k1 k, N N k,, k,, 1 P k, P N 2 k, 1 N k,, 1 P k,, 1 k, 1 P k, (1) where P k, and N k,, represen he prce and he number of shares, respecvely, of company k held by nsuonal nvesor a quarer. Ths defnon follows he ones commonly used o assess overall porfolo roaon of muual funds (e.g. Carhar, 1997). 7 The urnover raes obaned from (1) are hen averaged over he prevous 4 quarers o provde us wh a more sable and precse denfcaon of whch nvesors perssenly churn her porfolos. Fnally we defne Invesor Turnover for company k as he weghed average of he (me-averaged) urnover raes of all s nsuonal nvesors: 4 1 Invesor Turnoverk, wk,, TR, r 1 (2) 4 r1 S k, where S k, s he se of shareholders n company k a me, and w k,, s he wegh of nvesor n he oal percenage held by nsuonal nvesors a quarer n company k. I s mporan o noe ha Invesor Turnover s based on he overall porfolo behavor of nvesors n frm k, and no on urnover a he level of he sock of he company nvolved n a dsrbuon even. Ths makes less lkely o be conamnaed by nformaon-based radng due o an approachng dsrbuon announcemen. Furhermore, n our ess Invesor Turnover (as well as all oher ndependen varables) are lagged one perod, furher ensurng ha Invesor Turnover s predeermned wh respec o he even. 8 To supplemen our ess, we also compue he fracon of a frm's shares held by Hgh (Md/Low) Turnover nvesors as he sum of holdngs held by nvesors n he op (mddle/boom) 33rd percenle of he me averaged urnover raes (he expresson nsde he parenheses n equaon 2) n every year. 7 By consrucon he range of he Invesor Turnover varable s he nerval [0,2]. When performng hs calculaon, we exclude hroughou he sample nvesors who ener he 13F unverse for he frs me n he quarer (for hey would auomacally have a maxmum urnover rae of 2). We also exclude from he procedure any sock of a company ha has jus enered he sample for exacly he same reason. 8 We also check wheher frms exhb me-seres changes n Invesor Turnover n he quarers surroundng changes n payou polcy announcemens and fnd no evdence of nvesor pre-posonng pror o an announcemen. 7

9 2.3. Conrol varables Daa on accounng varables s obaned from COMPUSTAT (please refer o he Appendx A for defnons and deals on varable consrucon). The se of conrol varables ha we use follows closely he one employed by Jagannahan e al. (2000). We use he log of frm asses, he Marke-o- Book rao, and he Deb-o-Equy rao o conrol for frm sze, value, and leverage. We nclude operang ncome, non-operang ncome, and he sandard devaon of operang ncome o conrol for he mpac of he 'permanence' of cash-flows on he form-of-payou decson (e.g. Guay and Harford, 2000). We nclude he Pror Payou rao (average rao of dvdends o ne ncome n he pas hree years) because Jagannahan e al. (2000) fnd ha pas payers are more lkely o manan and/or ncrease dvdends (nsead of makng repurchases) due o possble dvdend sckness and axclenele effecs. We measure he lqudy of he frms' asses as he dfference beween curren asses and curren lables normalzed by oal asses. To reduce nose, our accounng varables are equalweghed movng averages consruced from he values of he varables n he pas hree years. 9 We gaher daa on sock marke-relaed varables from CRSP. We compue he las 12 monhs' sock reurn o conrol for he mpac of recen run-ups n he decson o payou. We use wo measures o conrol for ndvdual sock lqudy, because he laer has been found o nfluence he decson o repurchase (e.g. Brockman, Howe, and Moral, 2008) and one possble crcsm of he Invesor Turnover measure s ha mgh be correlaed wh lqudy. 10 The frs measure s he share urnover of he pas year, defned as yearly radng volume dvded by he number of shares ousandng. The second measure s Amhud's (2002) Illqudy rao, he yearly average of he daly rao beween a sock s absolue reurn and s dollar volume. Fnally, we use as proxy for nformaon asymmery he number of analyss from I/B/E/S. We exend hs basc se of conrol varables by addng oher mporan conrols n some of our regresson specfcaons. We compue from ExecuComp he average level of manageral ownershp and he average percenage of execuve compensaon pad n he form of opons, o conrol for he nfluence of compensaon n payou choces (e.g. Dmar, 2000; Fenn and Lang, 2001; Kahle, 2002). Fnally, we nclude he GIM Governance Index of Gompers, Ish and Merck (2003) o conrol for he nfluence of governance n he payou decson. 9 The sandard devaon of operang ncome s calculaed usng he prevous 5 years of daa. 10 Noe ha hs concern s mnmzed by he fac ha he defnon of Invesor Turnover for frm k s calculaed usng he urnover rae on all sock holdngs of each nvesor, no he urnover of her holdngs n frm k. 8

10 2.4. Summary Sascs Panel A of Table 1 presens he man characerscs of our frm-level panel. Our sample conans 25,197 frm-year observaons. The average frm pays ou 96 mllon dollars (M USD) n eher dvdends or repurchases, bu he dsrbuon of payou s subsanally skewed (DeAngelo, DeAngelo and Sknner, 2004). The medan frm pays 5M USD n dvdends per year and here s no repurchase acvy repored n slghly less han half of frm-years. The average share of repurchases n oal payou s 36% and slghly hgher for frms ncreasng her payou (48%). All remanng varables are lagged one perod wh respec o he payou measures. Concernng nsuonal ownershp, Table 1 shows ha n our sample nsuons hold on average 51% of he frm's shares. The average Invesor Turnover s 0.22, whch means ha around 0.22/2=11% of he porfolo s urned over n a quarer, or around 44% of he poson s urned over n a gven year. 11 One equvalen way o pu s ha he nsuonal nvesors are holdng an average sock n her porfolo for a perod of around 12/0.44=27 monhs. Shor-erm nvesors (ha s, nvesors n he op hrd n erms of urnover raes n a gven year) hold abou 9% of he frm, whle long-erm nvesors hold abou 23% of he frm on average. The sascs for our accounng varables are comparable wh he summary sascs repored n Jagannahan e al. (2000). The average (log) frm sze s 6.2, correspondng o abou 495 mllon dollars n asses. The medan frm has operang margns of 15% of asses and a Marke-o-Book rao mulple of 2.2. Managers of frms n our sample own 4% of he frm and he average frm has a score of 9 n he GIM ndex of governance. Noe ha he number of observaons of our exended specfcaon s lower because execuve compensaon daa s only avalable afer 1992 and he governance ndex s only avalable for a lmed number of frms. Panel B of Table 1 presens summary sascs a he even level for frms wh repurchase announcemens and dvdend ncrease announcemens. In addon o he varables descrbed earler, we calculae he Cumulave Abnormal Reurn (CAR) for he daly wndow (-1, +1) around each even dae and a proxy for he sze of a repurchase based on he number of shares sough n he ransacon. 12 Panel B of Table 1 repors ha he average CAR for repurchasng frms s 2%, and ha frms nend o acqure 6.8% of her shares on average. To beer undersand he dfferences beween frms engagng n share repurchases and frms announcng an ncrease n dvdends, Panel B of Table 1 shows means and medans of all he varables separaely for he wo ses of frms. "Sgnfcance sars" for he -es (rank sum es) of equaly of means (medans) are also presened. All he conrol varables are lagged one year wh respec o he payou announcemen dae. The able shows ha, relave o frms announcng an ncrease n dvdend, 11 Recall ha Invesor Turnover akes values n he nerval [0,2]. Specrum has a quarerly frequency and he esmaes of urnover are naurally lower han hose ha would have been obaned f we had had daa a a hgher frequency. 12 When SDC does no conan daa on he number of shares sough n he repurchase, we esmae usng he acual repurchase amoun repored n CRSP n a year and he average share prce durng he year. 9

11 repurchasng frms have hgher Invesor Turnover and smaller sze, hgher Marke-o-Book raos, lower operang margns, hgher operang ncome volaly, and lower recen sock marke performance. Repurchasng frms also have hgher share urnover bu also hgher average llqudy. Ths evdence s conssen wh he fndngs of prevous leraure and ndcaes he mporance of conrollng for all hese characerscs n he regresson analyss. 3. Shareholder Invesmen Horzons and Payou Polcy 3.1. Invesor Turnover and he Share of Repurchases n Payou We sar by lookng a he relaon beween shareholder nvesmen horzons and he use of repurchases as a fracon of frms oal payou. The dependen varable s lef- and rgh-censored a 0 and 1, respecvely. For ha reason we esmae a Tob model (droppng frm subscrps for clary) y * 1, 1 1 Turnover Invesor Χ (3) y 1, 0 * y1, 1 f f 0 y f y 0 * 1, * 1, * 1, y 1 1 where y 1, he dependen varable, s he observed share of repurchases n payou and X s a marx conanng he conrol varables descrbed n secon 2.3. Table 2 presens he esmaon resuls. In Panel A, he dependen varable s he Share of Repurchases n Toal Payou across all payng frms. In Panel B, he dependen varable s he rao of Repurchase n Payou-Increasng Frms, n whch, as he name ndcaes, we resrc ourselves o frms ha perform eher a repurchase or a dvdend ncrease n a gven year, n he spr of Guay and Harford (2000). Resuls are very smlar n he wo cases, so we commen mosly usng he resuls of Panel A. The resuls of our basc specfcaon n column 1 of Table 2 show ha Invesor Turnover affecs posvely he share of repurchases (coeffcen -sasc 6.28), provdng evdence ha a hgher proporon of shor-erm nvesors s assocaed wh a hgher use of buybacks. Resuls for oher varables are n lne wh prevous leraure. The use of a hgher fracon of repurchases s assocaed wh smaller frms (coeffcen of Sze s negave wh -sasc -8.45), frms wh lower Operang Income (-sa ) and more volale operang ncome (-sa. 3.69), and wh worse prevous sock performance (-sa ). The coeffcen of Insuonal Holdngs s no sascally sgnfcan (and n general does no have a conssen sgn across specfcaons). Fnally, repurchasng frms exhb 10

12 hgher radng volume (-sa. 4.17) bu Illqudy does no seem o affec he proporon of repurchases n oal payou. Column 2 presens esmaon resuls usng he expanded se of conrol varables. Frms wh hgher Manageral Holdngs repurchase relavely less (-sa ), and frms n whch execuves receve more of her compensaon n opons repurchase relavely more (-sa. 6.88). The laer resul s conssen wh fndngs of Fenn and Lang (2001) and Kahle (2000). Beer governance also seems o be assocaed wh more repurchases (-sa ). Ths resul dffers from ha of John and Knyazeva (2006) ha repor an nsgnfcan coeffcen n a smlar ype regresson. Noe also ha, because of daa avalably for hese corporae governance varables, he number of observaons n hs specfcaon drops subsanally relave o our basc specfcaon. To gauge he economc sgnfcance of our resuls, we noe ha an ncrease n one sandard devaon of Invesor Turnover (equal o from Panel 1 of Table A) corresponds o a decrease n nvesmen horzon of 7 monhs relave o he sample average of 27 monhs. 13 Mulplyng he margnal effec of (from column 1 of Panel A) by 0.076, we ge an ncrease n he share of repurchases n oal payou of abou 9.6%. Ths represens an ncrease n he payou share of he average repurchase from 35.6% o 45.2%. In columns 3 and 4 of Table 2, we use as man ndependen varable he fracon of ownershp held by dfferen ypes of nvesors classfed accordng o her nvesmen horzon. Recall ha a Hgh (Md/Low) Turnover Invesor s an nsuon on he op (md/boom) hrd n erms of overall porfolo urnover rae n a gven year. The resuls show ha he holdngs of Hgh Turnover Invesors are srongly posvely assocaed wh he proporon of repurchases n oal payous (coeffcen -sa n column 3 of Panel A), whle he holdngs of Low Turnover Invesors are negavely assocaed wh repurchases (-sa ). These resuls are robus across specfcaons n boh Panel A and B. To gauge he sgnfcance of hese effecs, an ncrease of one sandard devaon n IO of Hgh Turnover Invesors (0.074 from Table 1) would lead o an ncrease n he use of repurchases of = 7.9%. Smulaneously, an ncrease n IO of Low Turnover Invesors of one sandard devaon (0.15 from Table 1) would lead o a decrease n he use of repurchases of = -5.5% An Addonal Tes Based on Informaon Asymmery The Lucas and McDonald (1998) (LM) model predcs ha he mpac of a repurchase wll be sronger n suaons n whch he asymmery of nformaon beween he frm and he marke s hgh. We es hs predcon by compung wo proxes commonly employed o capure nformaon asymmery. The frs s he frm-level Analys Forecas Errors (AFE), he yearly average of he 13 Addng o he sample average of Invesor Turnover of Panel A of Table 1 (0.221) gves a urnover of 0.296/2 = 14.8% per quarer, or 59.2% per year. Ths leads o an nvesmen horzon of 12/0.59 = 20 monhs. 11

13 monhly forecas error n end-of-fscal-year earnngs per share (EPS). For every monh we calculae he rao (acual EPS average forecas EPS) / average forecas EPS and average over he year. The second s Dsperson of Opnon (DOP), he rao beween he sandard devaon of analyss EPS forecass and he absolue value of he average EPS forecas. Based on hese varables, we creae wo dummy varables ha ake he value of 1 f a frm s above he sample medan n erms of AFE or DOP n a gven year, and 0 oherwse. We call hese Hgh AFE and Hgh DOP frms, respecvely. We hen nerac hese wo dummy varables wh Invesor Turnover and nser hem n our regresson specfcaon. The coeffcens of hese neracons allow us o undersand f here s a dfferenal mpac of Invesor Turnover n frms for whch asymmerc nformaon s hgh. We also nroduce n he specfcaon he level of AFE and DOP o conrol for he level of asymmerc nformaon surroundng he frm. The resuls n columns 5 and 6 n Panel A of Table 2 ndcae ha he predcons of he LM model seem correc. No only Invesor Turnover s sll posve and sgnfcan conrollng for nformaon asymmery, bu he neracon erms Invesor Turnover Hgh AFE and Invesor Turnover Hgh DOP are posve and sascally sgnfcan (-sa 1.73 and 1.98, respecvely). The resuls are sronger n Panel B, for he se of payou-ncreasng frms, wh larger coeffcens and sronger -sascs (-sa 3.48 and 2.70). Of he wo proxes for asymmerc nformaon, only DOP s posve and sgnfcan a he 10% level. We conclude ha he evdence s n favor of our workng hypohess Invesor Turnover and he Repurchase vs. Dvdend Decson Ths secon focuses on he relaon beween shareholder nvesmen horzons and he decson by frms o make a repurchase or ncrease her dvdend payou. We esmae a Prob regresson y * 2, Invesor Turnover Χ (4) y 2, 0f 1f y y * 2, * 2, 0 0 where y 2, he dependen varable, s an ndcaor varable ha akes he value 1 f a frm makes an open marke repurchase announcemen and 0 f he frm announces an ncrease n dvdends. X s agan he marx of conrol varables descrbed n secon 2.3. Column 1 of Table 3 presens he resuls of esmang he Prob model under our basc specfcaon. The coeffcen of Invesor Turnover s posve and hghly sgnfcan (-sa. 5.34). Ths suggess ha frms held by shor-erm nvesors are more lkely o choose o repurchase shares raher han a dvdend ncrease when decdng how o dsrbue cash. The margnal effec of Invesor 12

14 Turnover s (no shown n he able), mplyng ha an ncrease of one sandard devaon n Invesor Turnover represens an ncrease n he probably of a repurchase of around = 2.6%. 14 Ths s a 5.6 percen ncrease relave o he uncondonal mean lkelhood of a repurchase (equal o 8,104/17,604 = 46% from Table 1). The esmaes n column 2 ha conrol for execuve compensaon characerscs and frm governance yeld smlar resuls. Columns 3 and 4 of Table 3 show ha IO of Hgh Invesor Turnover has a posve and sgnfcan loadng (-sa. 5.45), and IO of Low Invesor Turnover has a negave and sgnfcan loadng (-sa. 2.48). In erms of margnal effecs (no shown n he able), he wo varables menoned have dervaves of 0.33 and respecvely. Ths mples ha an ncrease of one sandard devaon n IO of Hgh Turnover Invesors leads o an ncrease n he probably of repurchases by = 2.4%. Smulaneously, a ncrease n IO of Low Turnover Invesors of one sandard devaon (0.15 from Table 1) would lead o a decrease n he use of repurchases by = -1.8%. The coeffcens of he oher explanaory varables are n lne wh prevous leraure. The probably of a repurchase s negavely assocaed wh frm sze, albe no n every specfcaon. Varables reporng conssenly sgnfcan resuls across all specfcaons are Operang Income (negave correlaon wh choosng a repurchase), Sandard Devaon of Operang Income (posve correlaon wh choosng a repurchase), Las 12 Monh Reurn (negave correlaon), and Las 12 Monh Share Turnover (posve correlaon). Fnally, columns 5 and 6 repea he es suggesed n secon 3.2 by ncludng neracon erms beween Invesor Turnover and proxes ha capure hgh nformaon asymmery. We fnd ha hese neracons are posve and sascally sgnfcan (-sa n he case of Invesor Turnover Hgh AFE and -sa n he case of Invesor Turnover Hgh DOP). Hence he mpac of Invesor Turnover on he payou decson s sronger for frms characerzed by sronger nformaon asymmery Shareholder Invesmen Horzons and he Marke Reacon o Repurchase Announcemens The fnal esable predcon concerns he relaon beween Invesor Turnover and he marke's reacon o repurchase program announcemens. We adop a cross-seconal even-sudy framework and run he followng regresson model CAR Invesor Turnover Χ (5) All margnal effecs n hs paper are evaluaed usng he sample average of he ndvdual margnal effecs. 13

15 where he dependen varable s he cumulave abnormal reurn over he daly wndow (-1, +1) around he announcemen of an open marke repurchase. X, he marx of conrol varables, s smlar o he one employed n prevous specfcaons plus he sze of he share repurchase as an addonal conrol. The resuls are repored n Table 4. Column 1 shows ha he coeffcen of Invesor Turnover s negave and sascally sgnfcan (coeffcen , -sa ). In erms of economc sgnfcance, an ncrease of nvesor urnover of one sandard devaon reduces he abnormal reurn by = -0.28%, a decrease of 14 percen relave o he sample average of 2.0% cumulave abnormal reurn. Ths resul s robus across he dfferen specfcaons repored n he able. Columns 3 and 4 show ha he effec of Invesor Turnover seems mosly concenraed n he se of nvesors wh parcularly Hgh Turnover. The coeffcen of IO of Hgh Turnover Invesors s negave and srongly sgnfcan (coeffcen , -sa ). A change of one sandard devaon n he ownershp by hese nvesors reduces he abnormal reurn by = -0.40%, or 20 percen relave o he sample average CAR. Regardng he oher varables of neres, Sze of Repurchase s srongly posve and sascally sgnfcan across all specfcaons. The coeffcen on Insuonal Ownershp s negave and sascally sgnfcan n all bu one model. Ths resul confrms he evdence of Amhud and L (2006) who fnd ha hgher nsuonal ownershp seems o be assocaed wh lower sgnalng power of payou polcy announcemens. Oher varables ha have sgnfcan resuls n mos specfcaons nclude Sze (negave correlaon wh abnormal announcemen reurns), pror sock reurns (negave correlaon) and Illqudy (posve correlaon). Fnally, columns 5 and 6 presen resuls condonng on he level of nformaon asymmery. The coeffcen esmaes of he neracon erms Invesor Turnover Hgh AFE and Invesor Turnover Hgh DOP are posve and sascally sgnfcan. Takng he frs of he neracons as an example, he resuls n column 5 show ha he effec of Invesor Turnover on reurns s dampened by abou 40% relave o he pon esmae of Invesor Turnover alone (0.021/0.052). A hgh amoun of uncerany surroundng he frm makes he marke adjus s valuaon by relavely more, condonal on he horzon of he frm's nvesors. Ths s wha he Lucas and McDonald model would predc. Surprsngly he resuls show ha he level of asymmerc nformaon (ha s, he level of AFE and he level of DOP) does no seem o maer. However he srong sascal sgnfcance of Illqudy mgh mean ha hs varable s pckng up he level of adverse selecon mplc n sock prces. 14

16 4. Robusness Checks 4.1. Invesmen Horzons and he Absolue Level of Payou Our frs robusness check addresses he ssue of wheher our fndngs hold for he level (and no only he proporon) of repurchases. We esmae an OLS regresson of he level of boh repurchases and dvdends on Invesor Turnover and our se X of conrol varables: y 4, Inv. Turnover Χ (6) In our mplemenaon of y 4 we ake logarhms of he levels of payou o accommodae he skewness exhbed by hese varables and dscussed n secon 2.4. Table 5 presens he resuls. In columns 1 o 3, he dependen varable s he log of (1 + Repurchases Amoun). The resuls show ha Invesor Turnover s posve and sascally sgnfcan (coeffcen 0.316, -sa. 2.21). The esmae n he exended specfcaon s larger, bu of smlar sascal sgnfcance (coeffcen 1.054, -sa. 2.00). Fnally, he mpac of he fracon of shares held by Hgh Turnover Invesors s posve and sgnfcan a he 10% level (coeffcen 0.680, -sa. 1.72). These resuls are n conras wh hose of columns 4 o 6, n whch he dependen varable s he log of (1 + Dvdend Amoun). The coeffcens of Invesor Turnover are negave and srongly sgnfcan (coeffcen , -sa n he basc specfcaon). Column 6 shows ha he presence of Hgh Turnover and Md Turnover nvesors s negavely assocaed wh dvdend payous bu he presence of Low Turnover nvesors s assocaed wh larger dvdend payous (coeffcen 0.504, -sa. 2.20). We conclude ha he nvesmen horzon of shareholders affecs payous n he drecon predced by our hypohess Causaly Analyss One concern regardng he resuls n secon 3 s ha causaly mgh run from payou polcy o shareholder nvesmen horzon f repurchasng frms arac shor-erm nvesors and dvdend-payng frms arac long-erm nvesors. Allen, Bernardo, and Welch (2000) propose a model n whch frms use dvdends o arac a clenele of nsuons ha can effecvely monor hem, a propery whch has been assocaed wh long-erm nvesors (Gaspar, Massa and Maos, 2005; Chen, Harford and L, 2007). To address hs ssue, we run a es of causaly beween he choce of payou polcy (Share of Repurchase o Toal Payou) and Invesor Turnover. We esmae he followng panel vecorauoregressve model (e.g. Holz-Eakn, Newey, and Rosen, 1988) 15

17 SR, SR 5 5,-1 IT 5 Χ (7), -1 5, 1 5 5, IT, IT SR 6 6, -1 6,-1 6, 1 6 6, Χ (8) where SR, denoes Share of Repurchases, IT, denoes Invesor Turnover, X, s a marx of conrol varables, he represen frm-specfc effecs,, represen serally uncorrelaed dosyncrac errors, and ndces = {1,..., N}, = {1,..., T } represen frms and years, respecvely. The specfcaon assumes ha he dynamcs of he endogenous varables are such ha akes no more han one year for he pas values of endogenous varables o affec her fuure values. Ths modelng choce s based on he resuls of Grnsen and Mchaely (2005), who, n her analyss of he dynamc relaon beween nsuonal ownershp and payou polcy, repor ha a lag of one perod seems o beer f he daa. We use frs dfferences o elmnae he frm-specfc effec (whose correlaon wh he lagged dependen varable renders leas-squares esmaon nconssen), obanng SR, SR 5,-1 IT 5 Χ (9), -1 5, 1 5, IT, IT SR 6, -1 6,-1 6, 1 6, Χ (10) Each equaon s esmaed ndvdually usng a generalzed-mehod-of-momens (GMM) dynamc panel daa esmaor o accommodae he correlaon beween he frs-dfferenced errors and he lagged dfferences of he endogenous varable mplc n (9)-(10). The frs wo observaons for each frm n he panel are los o lags and dfferencng. Arellano and Bond (1991) use he lagged levels of he endogenous varables o oban he momen condons E SR EIT 0, 3,..., T, 2 s 1. (11), s,, s, The number of momen condons mpled by (11) can be very large. In our emprcal mplemenaon we lm ourselves o he second, hrd, and fourh lag (2 s 1 4) of he endogenous varables. In addon, he nsrumen marx mpled by (11) suffers from a weak nsrumen problem f he auoregressve parameer s close o one,.e. f he dependen varable exhbs severe perssence (Blundell and Bond, 1998; Blundell, Bond and Wndmeer, 2000). The Blundell and Bond esmaor herefore adds o he nsrumen marx momen condons ha ulze he lagged dfferences of he endogenous varables of he equaon n levels: SR, 1, EIT, 1, 0, 3 T E,...,. (12) Momen condons (11) and (12) are enough o denfy he parameers of neres and. Full deals abou he esmaon procedure can be found n Appendx B. Table 6 presens our resuls focusng only on he parameer esmaes of he endogenous varables. The able also repors wo dagnosc ess. Frs, we es f he dfferenced resduals are frs- 16

18 order negavely auocorrelaed and second-order serally uncorrelaed, as requred by he assumpons of he GMM esmaor (e.g. Arellano and Bond, 1991; he able shows he p-value of he laer es). Second, he Sargan es of over-denfyng resrcons s repored along wh our resuls o ensure ha he nsrumens are appropraely chosen. In Panel A he endogenous varable relaed o repurchases s he Share of Repurchases n Toal Payou, whle n Panel B s he Share of Repurchases n Payou- Increasng Frms. In boh panels he esmaes n columns 1 and 2 employ our basc specfcaon, whle esmaes n columns 3 and 4 employ our exended specfcaon ha ncludes governance and manageral ownershp measures. Resuls ndcae ha he causaly runs from nvesor characerscs o payou polcy raher han he oher way around. Focusng on columns 1 and 2 of Panel A, he lagged Share of Repurchases varable s srongly sascally sgnfcan n he Share of Repurchases equaon (-sa ) and Invesor Turnover s also posve and sascally sgnfcan (-sa. 2.08). In conras, n he Invesor Turnover equaon he lagged value of Invesor Turnover s sgnfcan (-sa. 1.83) bu no he lagged value of he payou polcy varable (-sa. 0.22). Panel B repors smlar esmaes n he se of payouncreasng frms. These resuls suppor he nerpreaon ha nvesmen horzons affec he relave use of buybacks or dvdends bu no he oppose Sample Selecon Issues The hypoheses derved from he Lucas and McDonald (1998) model apply o he sample of frms wh posve payou, for whch he man decson s how o dsrbue cash o shareholders. Our focus on hs sample rases he queson of a possble sample selecon problem. If Invesor Turnover affecs he lkelhood of frms makng dsrbuons o shareholders n he frs place, he esmaes presened so far mgh suffer from sample selecon bas. We herefore replcae our resuls usng a wo-sage Heckman mehodology. In hs subsecon we presen he resuls of he second sage esmaon (secon 5 dscusses he esmaon resuls of he frs-sage selecon equaon). We esmae several models of he ype z * Invesor Turnover X W (13) y 8, 8 8 Turnover Invesor Χ (14) y 8, unobserved y8, f f z z * * We also check he sably of he VAR sysem by compung he domnan characersc roo of he marx of parameer esmaes of he endogenous varables shown n Table 6. The modulus of all roos s less han one, ndcang ha he sysem dynamcs mpled by he parameer esmaes s sable (e.g. Greene, 2003). 17

19 n whch he dependen varable y 8 refers o he dfferen lef-hand sde varables of neres analyzed n secon 3. The laen varable z * n he selecon equaon (13) deermnes wheher y 8 s observed. The parameer n he oucome equaon (14) refers o Heckman's (1979) "Lambda" ha correcs for sample selecon, and he sandard errors of he second sage are correced o accoun for he fac ha s a generaed regressor. To help owards model denfcaon, we supplemen he marx of conrol varables X wh anoher se of varables W ha we posulae o be correlaed wh selecon bu no wh observed oucomes. We use wo varables: Sales Growh, he average of he pas hree years' percenage change n sales; and Log of Frm Age, he (lagged) naural logarhm of he me n years snce he frm frs eners he COMPUSTAT daabase. Our raonale s ha boh of hese varables reflec he degree of maury of he frm, whch s an mporan deermnan of wheher he frm wll nae payous (e.g. Grullon, Mchaely and Swamnahan, 2002). Table 7 presens he resuls of he second-sage oucome equaon for our hree man resuls. Columns 1 and 2 of Table 7 replcae columns 1 and 2 of Panel A of Table 2; columns 3 and 4 replcae columns 1 and 2 of Table 3; and columns 5 and 6 replcae columns 1 and 2 of Table 4. The frs-sage resuls can be found n column 5 of Panel A of Table 8 and are descrbed n secon 5.2. The resuls of columns 1 and 2 show ha he coeffcen of Invesor Turnover s posve and sgnfcan n boh specfcaons, alhough he magnude of he coeffcens s lower han n Table 2 (for example, he sample-selecon adjused esmae n he basc specfcaon s n column 1 of Table 7 versus n Table 2). A leas par of hs decrease n magnude s explaned by he fac ha we run he oucome equaon as an OLS (albe wh correced sandard errors), no akng no accoun he censorng of he Share of Repurchases varable (an nspecon of all oher varables' coeffcens ndcaes ha he pon esmaes are unformly lower n absolue value). Concernng oher varables, Sandard Devaon of Operang Income and Las 12 Monh Share Turnover are srongly posvely correlaed wh he use of repurchases. Ineresngly he Sze varable changes sgn and he sample-selecon adjused esmae s srongly posve. Columns 3 and 4 also suppor our prevous fndngs n Table 3. The coeffcen of Invesor Turnover s posve and srongly sascally sgnfcan n boh specfcaons, wh somewha larger pon esmaes han hose of Table 3. Resuls for oher varables are smlar, apar from Las 12 Monh Reurn whch changes sgn. Fnally, columns 5 and 6 also show a negave and sascally sgnfcan mpac of Invesor Turnover on he marke's reacon o he repurchase announcemen. The pon esmaes are slghly larger han n Table 4; as an example, he coeffcen of Invesor Turnover n column 5 (-0.055, -sa ) mples a reducon of he abnormal reurn by = -0.4%, a decrease of 20 percen relave o he sample average of 2.0% cumulave abnormal reurn. The resuls for he remanng 18

20 varables are smlar, wh he Sze of Repurchase havng a srongly posve nfluence on he marke's reacon. We conclude ha our resuls are no drven, and are robus o, sample-selecon ssues The valdy of he dvdend ax-dsadvanage assumpon The Lucas and McDonald (1998) sgnalng equlbrum reles on he dual assumpon ha nvesors are axable and ha dvdends are ax-dsadvanaged wh respec o repurchases. Our use of nsuonal shareholdngs o es he model rases he queson of wheher hs s a vald assumpon for hs se of nvesors. Some nsuons such as penson funds are ax-exemp and mgh be ndfferen wh respec o he form of payou (or mgh even prefer dvdends f her corporae saus allows hem o capure dvdend ax exempons). There are good reasons o beleve ha he assumpon ha nvesors are ax-sensve s vald for he average nsuonal shareholder n our sample. The frs reason s ha many nsuons manage boh axable and non-axable accouns. Ths s he case for banks, muual funds, and nsurance companes, as well as a large fracon of nvesmen advsers whose ax saus canno be precsely denfed. 16 The second reason s ha, whn he se of nsuonal shareholders, axable nvesors have probably more ncenves o be vocal abou her preferences on payou polcy han non-axable nvesors. Afer all, he laer are ndfferen abou he form of payou. 17 The hrd reason s ha he preference for repurchases of a (parly-) axable nsuon can be jusfed by he value of he axmng opon provded by repurchases. The raher long duraon of he average repurchase program (e.g. Sephens and Wesbach 2008; Cook Krgman and Leach 2004) provdes nvesors wh he opporuny o me her rades o mnmze he oal porfolo axable capal gans. 18 In summary, we beleve ha he exsence of dfferences n axaon beween payou choces s a reasonable assumpon for our sudy. Neverheless we follow possble falsfcaon sraeges wh respec o he role of axes n our fndngs. In unrepored regressons we dvde he sample no wo me-perods based on he gap 16 Banks, muual funds, and nsurance companes manage boh axable and non-axable asses (e.g. Jn 2006, Desa and Jn 2011, Cohn and Sykes 2010). Cohn and Sykes (2010) repor ha nsuonal nvesors wh an denfable ax saus hold 8% of he equy of frms n her sample, among whch 3% (38%) s held by ax-sensve nvesors. Gven ha for a comparable perod nsuons hold 53% of he equy of frms n our sample, hs ndcaes ha only abou 15% of nvesors holdngs are denfable as axable or non-axable. Among nsuons whose ax saus can be precsely denfed, Jn (2006) repors ha abou 57% of he nsuons and abou 40% of her porfolo dollar value are axable. In conras, usng he ThomsonReuers nvesor ypology, Chey and Suez (2005) argue ha only 15% of he dollar porfolo holdngs of nsuons s non-axable. 17 Srckland (1997) repors evdence ha holdngs by non-axable nvesors are no sysemacally assocaed wh eher hgh or low dvdend-yeldng socks, conssen wh hs vew. 18 Dfferen esmaes of he value of hs ax-mng opon have been found n he leraure. Poerba (1987) saes ha he effecve ax on repurchases s 25% of he effecve ax rae on dvdends. Green and Hollfeld (2003) calbrae a personal-ax capal srucure model and fnd ha he opon o defer capal gans reduces he effecve ax rae on repurchases o 60% of he sauory rae. Chay, Cho, and Ponff (2006) esmae ha he effecve rae on capal gans s 50% o 80% of he effecve ax rae on dvdends, he lower number applyng o he curren pos-2003 ax raes. 19

21 beween he ax raes on dvdends and on repurchases (Desa and Jn, 2011). We fnd ha Invesor Turnover has always a posve sascally sgnfcan assocaon wh makng repurchases, and ha he parameer esmaes are slghly larger n years n whch he ax gap s low, n accordance wh he Lucas and McDonald model predcons. 19 We also use he ypology of nsuons from ThomsonReuers o denfy nvesors ha mgh prefer dvdends (.e. nsurance companes) and nvesors ha are no subjec o axes (.e. penson funds, endowmens, foundaons). 20 In unrepored regressons we fnd ha when nsurance companes hold a sgnfcan fracon of he frm s equy, he mpac of shareholder nvesmen horzon on payou choce s sascally sgnfcan bu lower n magnude. Ths ndcaes ha subsanal holdngs by dvdend-preferrng nvesors counerac he nfluence of shor-erm nvesors, bu he effec s no very srong. 21 Large holdngs by endowmens, foundaons and penson funds seem o play no role n moderang he relaon beween payou choce and nvesmen horzon, whch mgh be due o he fac such non-axable nvesors are ndfferen o he ype of payou. Overall, we conclude ha our resuls are conssen wh axes playng a role n deermnng payou choce hrough he preferences of nsuonal nvesors. 5. Evdence Includng Frms wh Zero Payou 5.1. Long-erm nvesors, monorng, and he decson o pay Our ess focused so far whn he se of frms ha repor posve payous. Ths secon exends our ess o he enre sample of COMPUSTAT frms, lookng a he decson of non-regular payers o pay n a gven year as well as a he decson of non-payers o nae cash dsrbuons. Exendng he sample n hs way leads us ousde he Lucas and McDonald model because now he frm's decson on how o dsrbue cash s mngled wh he decson of wheher o dsrbue cash (n oher words, he amoun of dsrbuable cash s no longer fxed n advance). Wha facors would lead managemen o payou cash, and how could shareholder nvesmen horzon play a role n ha decson? One possbly s o nroduce moral hazard and he poenal monorng role of nsuonal nvesors (Easerbrook, 1984; Jensen, 1986; Shlefer and Vshny, 1986; Zwebel, 1996; Fluck, 1999). If long-erm nvesors possess superor monorng ables (e.g. Gaspar, Massa, and Maos, 2005; Chen, Harford, and L, 2007), hen ownershp by long-erm nvesors should 19 The model predcs ha, a hgh ax raes, he amoun of dsrbuons made hrough repurchases s very large for all ypes, so a margnal ncrease n shor-erm nvesors holdngs doesn ncrease repurchases by as much as n he low ax case. The model s predcons concernng he marke reacon o repurchase announcemens (and her relaon o shareholder nvesmen horzon) n dfferen ax envronmens s ambguous and depends on he underlyng parameer values. 20 Desa and Jn (2011) argue ha he corporae form of nsurance companes allows hem o benef from dvdend ax deducons, subjec o he caveas ha hey nves on behalf of boh axable and non-axable clens and dfferen pars of he ndusry (lfe nsurance, propery nsurance) have dfferen ax reamens. 21 Ths resul s no very surprsng n he lgh of he fndngs by Barclay, Holderness and Sheehan (2011) ha corporae shareholders (ha presumably prefer dvdends) do no seem o play a major role n deermnng dvdend payou. 20

22 be assocaed wh posve cash dsrbuons (of any knd). In addon, f dvdends are a sronger commmen o payou (Lnner, 1956), hen we would expec ownershp by monorng long-erm shareholders o be posvely assocaed wh dvdends, and ownershp by lenen shor-erm shareholders o be posvely assocaed wh repurchases. The clenele model of Allen, Bernardo, and Welch (2000) delvers a smlar predcon. In her model, managers neresed n keepng nsuonal nvesors wh monorng ables pay dvdends because he benefs of fuure monorng (mpounded n he frm s sock prce) counerbalance he ax cos of dvdends. We es hese predcons below by lookng a he relaon beween he lkelhood of a payou (and of a payou naon) and shareholder nvesmen horzon for he overall sample of frms wh eher posve or zero payou levels Lkelhood of Payou We sar by esmang a Prob model of he lkelhood of a payou n he se of frm-year observaons ha have non-mssng values for all he conrol varables n our basc specfcaon. The sample sze roughly doubles relave o our prevous ess of Tables 2 and 3. As explaned n secon 4.3, we add wo furher varables ha nfluence he decson o nae regular payous: Sales Growh, he average of he pas hree years' percenage change n sales; and Log of Frm Age, he (lagged) naural logarhm of he me n years snce he frm frs eners he COMPUSTAT daabase. Panel A of Table 8 presens he resuls. The dependen varable n column 1 and 2 s a dummy varable ha akes he value of 1 f a frm performs a share repurchase n a gven year, and 0 oherwse. In columns 3 and 4 he dependen varable s a dummy varable ha akes he value of 1 f a frm pays a dvdend, and 0 oherwse. Fnally, n columns 5 and 6 he dependen varable s a dummy varable ha akes he value of 1 f a frm has a posve payou, and 0 oherwse (he specfcaon n column 5 s he frs sage of he Heckman model presened n secon 4.3). Column 1 ndcaes ha Invesor Turnover s posvely assocaed wh repurchase acvy (coeffcen 0.243, -sa. 2.03). The comparave sacs reveal however ha he effec s small: he margnal effec (no repored) s 0.062, mplyng ha a one sandard devaon ncrease n Invesor Turnover ncreases he lkelhood of a repurchase n he sample by 0.6% (compared o an uncondonal repurchase frequency of 26%). 22 The resuls of column 2 for he dfferen subses of nvesors explan why hs s he case. The coeffcen of IO of Hgh Turnover Invesors s posve and sgnfcan, bu he IO of Low Turnover Invesors s also posve and sgnfcan (-sa. 5.62). Hence boh shor-erm and long-erm nvesors are assocaed wh repurchases n hs sample, n conras wh our fndngs n Table The sandard devaon of Invesor Turnover n hs larger sample s

23 Wh respec o dvdends, column 3 shows ha he loadng of Invesor Turnover n he lkelhood of a dvdend payou equaon s negave and sgnfcan (-sa ). Column 4 confrms ha Hgh Turnover Invesors are negavely assocaed wh dvdend payous (-sa ), whle he mpac of IO of Low Turnover Invesors s srongly posve and sgnfcan (-sa. 5.58). Fnally, column 6 ndcaes ha ownershp by Low Turnover Invesors s posvely assocaed wh posve payous of any knd (-sa. 7.29), bu he reverse s rue for Hgh Turnover Invesors (-sa ). In summary, n he exended sample Invesor Turnover s posvely assocaed wh repurchases and negavely assocaed wh dvdends, n agreemen wh our earler fndngs. However, ownershp sakes of long-erm nvesors are assocaed wh hgher lkelhoods of a non-zero dsrbuon, ndependenly of he form n whch such dsrbuon s made Payou naon Panel B of Table 8 repeas he same exercse bu now we focus on he frm's decson wheher o nae a dsrbuon. Columns 1 and 2 presen esmaon resuls n whch he dependen varable s a dummy varable equal o 1 n he frs year ha a frm announces a repurchase, and 0 oherwse. In columns 3 and 4 he dependen varable s a dummy varable ha akes he value of 1 n he frs year ha a frm announces a dvdend, and 0 oherwse. 23 The resuls show ha Invesor Turnover s posvely assocaed wh he lkelhood ha he frm makes a repurchase for he frs me (coeffcen 0.432, -sa. 3.06). Ths resul s due o he posve mpac of he holdngs of Hgh Turnover nvesors (-sa. 4.93). In conras, columns 3 and 4 ndcae ha he decson o nae a dvdend seems unrelaed o nvesor horzon. Neher Invesor Turnover nor he holdngs of he dfferen nvesor groups are sascally sgnfcan. Taken ogeher, he resuls from hs secon ndcae ha he presence of shor-erm orened nvesors nduces frms o conduc repurchases and o nae her payous va a repurchase. A he same me, shor-erm nvesors are assocaed wh lower use of dvdends boh for regular and nonregular payers. Ownershp by long-erm shareholders seems o be assocaed wh posve payous ndependenly of he way non-regular payers choose o make her dsrbuons. However hey don seem o play a role n forcng he frm o nae payous, bu mosly n he connuaon of cash dsrbuons once he frms sars dong so. These resuls are conssen wh a possble monorng role by long-erm orened shareholders, a leas f one looks a he populaon ha ncludes frms ha are no regular payers. 23 To esmae he repurchase or dvdend naon, we gnore he frs year n whch he frm eners he sample. Ths makes he number of observaons drop slghly relave o Panel A. 22

24 6. Dscusson Wha oher heores could poenally explan our resuls? Ths secon consders possble compeng explanaons n he conex of he exsng heorecal and emprcal leraure. For smplcy we separae he dscusson n wo pars, one focusng on he resuls whn he se of frms wh posve payou (secons 3 and 4), and he oher one he resuls n he exended sample (secon 5) Resuls n he sample of payers Brennan and Thakor (1990) propose an adverse selecon model n whch nformed nvesors prefer repurchases because he gves hem he opporuny o prof a he expense of unnformed nvesors. Ths heory could explan our fndngs for he sample of payers f we beleve ha nformed shareholders are he ones wh he shores nvesmen horzon. However n our vew hs nerpreaon suffers from several shorcomngs. Frs, managers could presumably fnd a way o reduce nformaon asymmery ha would no nvolve wealh ransfers beween shor-erm and long-erm shareholders. 24 Second, s unclear how o reconcle he superor nformaon of shor-erm shareholders wh he evdence concernng he monorng role of long-erm shareholders. 25 Thrdly, he Brennan and Thakor (1990) model mples ha adverse selecon coss should wegh on he lqudy of repurchasng frms, boh ex-ane (because frms wh a hgher proporon of nformed shareholders repurchase more ofen) and ex-pos (because afer a repurchase announcemen marke-maker should adjus he spread for he lkelhood of nformed radng). Boh of hese predcons are no borne ou by he daa. 26 Are moral hazard heores a poenal explanaon? If dvdends are a sronger commmen o payou cash, long-erm nvesors wh monorng ables could be assocaed wh hgher dvdends and lenen shor-erm shareholders wh repurchases. However n he sample of payers hs explanaon s no convncng. Frs, long-erm shareholders mgh prefer a repurchase f he laer acheves he same goal of akng cash away from managers hands whle beng more ax effcen (Nohel and Tarhan, 1998). Second, radonal agency models predc lower payous by frms held by lenen shor-erm shareholders, bu emprcally repurchase payous end o be larger han equvalen dvdend ncreases (Jagannahan e al., 2000). Thrd, he clenele model of Allen, Bernardo and Welch 24 Brennan and Thakor (1990) delberaely gnore he role of managemen as an nformed pary n her paper (p. 995). Noe ha snce managers rarely sell n a repurchase, hey would be dlung hemselves by buyng back overvalued shares. 25 See e.g. Bushee (1998), Gaspar, Massa and Maos, (2005), Chen, Harford, and L (2007), Lu and Peng (2006), Elyasan, Ja and Mao (2006), Shn (2008), and Cella (2009). Monorng requres he ably o acqure nformaon abou managemen s acons a a lower cos. Long-erm nvesors, havng been shareholders for longer, have had more me o learn abou he frm. Smulaneously hey have more ncenves o gaher nformaon because hey wll say n he frm for longer. 26 Brockman, Howe and Moral (2008) fnd ha ex-ane lqudy s posvely relaed wh he lkelhood of a repurchase. The fndngs on ex-pos lqudy are mxed. Papers reporng a negave mpac of repurchases on lqudy nclude Barclay and Smh (1988), Brockman and Chung (2001), and Gnglnger and Hamon (2007). Papers reporng a posve mpac nclude Mller and McConnell (1995), Grullon and Ikenberry (2000), and Chemmanur, Cheng and Zhang (2010). 23

25 (2000) predcs ha he causaly should run from payou polcy o ownershp srucure, bu our ess, lke hose of Grnsen and Mchaely (2005), rejec ha predcon. We conclude ha he agency framework does no f well he resuls n he sample of payers Resuls n he exended sample ncludng non-payers The resuls n he exended sample ndcae ha here seem o be wo effecs a work. Frs, he fndngs are parly conssen wh he adverse selecon model of Lucas and McDonald (1998). Ownershp by shor-erm nvesors has he same sgn as n he resuls for he sample of payers, confrmng he model s predcons. In conras, ownershp by long-erm nvesors s posvely assocaed wh boh dvdends and repurchases, an apparen conradcon of he model. However one canno read oo much no hs dchoomy. On he one hand, any sgnalng model of payou choce n whch he amoun of cash o dsrbue s known and fxed canno explan he decson of wheher o payou cash. 27 On he oher hand, he man nuon probably remans f we ry o exend he model o accommodae he possbly of zero payou. Suppose ha frms could choose o sore cash beween perods, and no make any payou f axes are oo hgh or f he frm s severely overvalued. 28 The coss of dluon are always borne by long-erm nvesors, and dluon only happens wh repurchases. Hence ownershp by long-erm nvesors should be negavely and no posvely assocaed wh repurchases. Some oher force s herefore a work n order for shareholder nvesmen horzon o maer n he exended sample. We hnk he mos lkely explanaon s monorng. The resuls n he exended sample address some of he crcsms made above when dscussng he resuls on he sample of payers. We fnd ha: long-erm shareholders do force payous hrough repurchases, compared o he alernave of no dsrbung cash; n addon, ownershp by shor-erm (long-erm) nvesors s negavely (posvely) relaed o oal payou, jus lke wha radonal agency heores would predc. However monorng canno be he full explanaon, because s no clear why lenen shor-erm nvesors also manage o exrac payous hrough repurchases. We conclude ha boh monorng and adverse selecon movaons for payou choce seem presen n he daa. These wo effecs however seem o apply o dfferen sages of he payou decson, wh he monorng explanaon havng more racon n he decson o payou cash, and he adverse selecon explanaon beng more compellng wh respec o he decson on how o spl ha cash beween dvdends and repurchases. Fuure heorecal n hs area should probably focus on he seemngly dfferen naure of he wo decsons. 27 Ths s he case for Brennan and Thakor (1990), Lucas and McDonald (1998), and Allen Bernardo and Welch (2000). 28 Chowdry and Nanda (1994) offer a model along hese lnes. 24

26 7. Concluson Ths paper ess he hypohess ha shareholder nvesmen horzon s an mporan source of nvesor heerogeney when frms decde how o dsrbue cash o her shareholders. Usng nsuonal ownershp daa, we consruc proxes for nvesmen horzons based on he frequency wh whch nvesors roae her overall sock porfolos. The resuls show ha frms whose ownershp srucures are characerzed by more shor-erm orened nvesors use a hgher proporon of repurchases n her payous, and more lkely o choose a repurchase relave o a dvdend ncrease. The marke reacon o repurchase announcemens by frms mosly held by shor-erm nsuons s posve bu lower han for repurchase announcemens by frms mosly held by long-erm nvesors. The evdence s conssen wh nvesmen horzon playng a role n he shf from payous n he form of dvdends o payous n he form of repurchases (Fama and French, 2001; Grullon and Mchaely, 2002). These fndngs are conssen wh a sgnalng model n whch undervalued frms sgnal her worh o he marke by makng relavely more repurchases. The sgnalng equlbrum s paramerc on he fracon of ownershp held by shor-erm orened shareholders. The laer benef from he posve prce reacon o a repurchase announcemen and herefore pu pressure on managers o dsrbue cash n ha way. The marke recognzes hese ncenves and arbues a lower valuaon change o repurchasng frms held by shor-erm nvesors. Alhough our analyss focuses on payers (he naural seng o es he model), we also perform ess n an exended sample ha ncludes non-payers. We fnd ha shor-erm nvesors are assocaed wh nang or makng a repurchase, whle long-erm nvesors are assocaed wh posve payous ndependenly of her form. Ths s conssen wh he noon ha long-erm nvesors have monorng ables (Gaspar, Massa, and Maos, 2005; Chen, Harford and L, 2007). We conjecure ha monorng consderaons seem o play a relavely larger role n he decson o payou cash, whle adverse selecon consderaons seem more relevan for how o dvde he payou beween dvdends and repurchases. Ths s an excng avenue for fuure research. 25

27 Appendx A Ths appendx descrbes n deal he consrucon of he varables used n our sudy. A.1 Payou varables Varable: Repurchases Amoun Dvdends Amoun Toal Payou Share of Repurchases n Toal Payou Dvdend Increase Share of Repurchases n Payou Increasng Frms Defnon and daa source: Annual dollar value of repurchases from COMPUSTAT (daa em PRSTKC). We rean only values for frm-years n whch here s an announcemen of an open marke repurchase n he SDC daabase n he curren or any of he prevous wo years (Jagannahan e al., 2000). We exclude he year 1987 (e.g. Ikenberry, Lakonshok and Vermaelen, 1995; Grullon and Mchaely, 2002). The SDC daa conans he necessary announcemen daes for he announcemen reurn regressons (we exclude he las quarer of 1987 for announcemen daa). Dollar amoun of dvdends from Compusa (em DVC). To gaher daa on announcemen daes correspondng o changes n dvdend polcy, we use he CRSP monhly fles and keep all evens wh CRSP declaraon codes equal o 1232 (ordnary quarerly dvdends) wh non-mssng declaraon daes. Followng Amhud and L (2006) we ake only hose dvdend ncreases where he change n he dvdend per share amoun s a leas 0.5%. Sum of he dollar amouns of dvdends and repurchases (Compusa PRSTKC+DVC). Dollar amoun of repurchases dvded by Toal Payou. Posve change n Dvdend Amoun per share mes he number of shares ousandng (Compusa em CSHO). Rao beween Repurchases Amoun and he sum (Repurchases Amoun + Dvdend Increase). A.2. Insuonal ownershp varables. Daa source: ThomsonReuers Specrum 13F daabase Varable: Defnon: Invesor Turnover Invesor Turnover n company k s calculaed n wo seps. Denong by Q he se of companes held by nvesor, he urnover rae TR of nvesor a quarer as Insuonal Ownershp (IO) IO of Hgh (Md/Low) Turnover Invesor TR, Q k 1 N P k,, k, Q k1 N N k,, 1 k, 1 P N k,, k, P 2 N P k,, 1 k,, 1 k, 1 where P k, and N k,, represen he prce and he number of shares, respecvely, of company k held by nsuonal nvesor a quarer. Invesor Turnover for company k s he weghed average of he average urnover raes over he prevous 4 quarers of all s nsuonal nvesors: Invesor Turnover K P k, w k,, TR 4 r1, r 1 where K s he se of shareholders n company k, and w k,, s he wegh of nvesor n he oal percenage held by nsuonal nvesors a quarer n company k. Rao of a frm s shares held by nsuonal nvesors relave o oal shares ousandng. IO of Hgh (Md/Low) Turnover Invesors s he fracon of a frm's shares held by nvesors n he op (mddle/boom) 33rd percenle of he nvesor's urnover raes over he prevous 4 quarers. 26

28 A.3. Accounng varables. Daa source: Compusa. Unless oherwse saed, all varables are equal-weghed movng averages consruced from he values of he varables n he pas hree years. Varable: Defnon and daa source: Sze Log of oal asses (Compusa em AT). Marke-o-Book Rao Rao of he marke value of equy a he end of he fscal year (he produc of ems PRCC_F and CSHO) o book value of equy (em CEQ). Deb-o-Equy Rao Rao of long erm deb (em DLTT) o he book value of equy (em CEQ). Operang Income Rao of operang ncome (em OIBDP) o oal asses (em AT) and s. Non-Operang Income Rao of non-operang ncome (em NOPI) o oal asses Sandard Devaon of Sandard devaon of he rao of operang ncome o he oal asses over he pas 5 years. Operang Income Pror Payou Rao Rao of oal dvdends (em DVC) o ne ncome avalable o common (em IBCOM). Lqud asses Curren asses (em ACT) mnus curren lables (em LCT) dvded by oal asses (em AT). A.4. Sock marke performance varables. Daa source: CRSP Varable: Las 12 Monh Sock Reurn Las 12 Monh Share Turnover Illqudy Defnon: Compounded monhly reurn for he prevous year. Sum of he radng volume over he prevous year dvded by he number of shares ousandng. Yearly average of he daly rao beween a sock s absolue reurn and s dollar volume, averaged over all days n he monh wh non-zero volume: ILLIQ k, s 1 Days k, s Days k s, R k, s, d DV ol d 1 k, s, d where Days k,s s he number of vald observaon days n year s, and R k,s,d and DVol k,s,d are, respecvely, he daly reurn and dollar volume of sock k on day d of year s. The rao s rescaled by a facor of A.5. Analys coverage varables. Daa source: I/B/E/S Summary Fles Varable: Defnon and daa source: Number of Analyss Average number of analyss coverng a sock durng a year. Analys Forecas Error (AFE) Yearly average of he monhly calculaon (acual EPS average forecas EPS) / average forecas EPS. We use forecass for he end-of-fscal-year earnngs per share (EPS). Dsperson of Opnon (DOP) Rao beween he sandard devaon of analyss EPS forecass and he absolue value of he average EPS forecas. Hgh AFE Indcaor varables ha akes he value of 1 f he frm's AFE s above he sample medan n a gven year, and 0 oherwse. Hgh DOP Indcaor varables ha akes he value of 1 f he frm's DOP s above he sample medan n a gven year, and 0 oherwse. 27

29 A.6. Governance varables Varable: Manageral Holdngs Manager Sock Opons GIM Governance Index Defnon and daa source: Sum of he shares owned excludng opons (em SHROWN_EXCL_OPTS) by he op fve execuves of each company dvded by he number of shares ousandng (em CSHO) from COMPUSTAT's ExecuComp Daabase. Rao of he value of opon compensaon (OPTION_AWARDS_BLK_VALUE) o oal compensaon (em TDC1) for he op fve execuves of each company from COMPUSTAT's ExecuComp Daabase. Gompers, Ish and Merck (2003) ndex of shareholder rghs based on 24 governance facors. A hgher score of he GIM ndex denoes lower qualy of governance from he Invesor Responsbly Research Cener. A.7. Announcemen reurn varables Varable: Defnon and daa source: Cumulave Abnormal Reurn The daly wndow (-1, +1) s obaned from Evenus usng he CRSP Value-Weghed Index (CAR) excludng dvdends. The parameer esmaon wndow ranges from -110 o -11 days wh a mnmum of 50 days of radng requred. Repurchase Sze Repurchase Sze s equal o SDC's percenage of frm's shares sough n he ransacon (em PSOUGHT) f ha em s no mssng. Oherwse s esmaed as he rao beween he dollar repurchases (em PRSTKC) and he average sock prce (em PRCC_F) over he frm's curren and prevous fscal years, self dvded by he prevous year's shares ousandng (em CSHO). Appendx B The procedure used o esmae each of equaons (7) and (8) s exacly smlar and can be descrbed usng only one equaon. Whou loss of generaly, we can wre he generc model o esmae as y, y, -1 w,-1, 1, Χ (B.1) n whch y, (y,-1 ) s he (lagged) dependen varable, w,-1 s assumed o be endogenous, and X,-1 s a marx of K srcly exogenous conrol varables. We assume he sandard condons hold:, E,, 0, 2 T E,, s 0, s E,...,. (B.2) Leas-squares esmaon of (B.1) leads o based esmaes because he lagged dependen varable s correlaed wh he unobserved frm-specfc effec. We remove usng frs dfferences o oban y, y,-1 w, -1, 1, Χ (B.3) The GMM esmaor of Arellano and Bond (1991) uses as momen condons he suably lagged levels of he endogenous varables: 28

30 29 1 2, 3,...,, 0,,,, s T w E y E s s (B.4) subjec o he nal condon T w E y E,..., 2, 0,,1, 1,. (B.5) Blundell and Bond (1998) show ha he nsrumens used n he Arellano and Bond esmaor become unnformave f he auoregressve parameer converges o uny. They sugges usng addonal momen condons gven by he lagged dfferences of he level equaon:. 3,...,, 0, 1,, 1, T w E y E (B.6) subjec o he nal condon (B.7) Jonly, (B.4) and (B.6) are known as GMM-ype nsrumens. The lagged dfferences of he exogenous varables are added as sandard nsrumens for hemselves: x E, 0,,. (B.8) Usng all avalable lags, he number of orhogonaly resrcons mplc n (B.4), (B.6), and (B.8) s K m m 2 τ τ 1 where = max {T }. In our emprcal mplemenaon, we use he second, hrd, and fourh lag (2 s 1 4) of he endogenous varables when consrucng he momen condons (B.4). Hence he number of orhogonaly resrcons reduces o 2(2)3+2(2)+K. These resrcons are suffcen o denfy and esmae (B.3) for T 3, under assumpons (B.2), (B.5) and (B.7). The model can be rewren for each ndvdual as y 1 Χ * where 1, 1,,-1 *,, - w y Χ X s of dmenson T (K+2), 1 s a un vecor of dmenson T, and,, s a vecor of dmenson K + 2. The correspondng equaon n dfferences s. * y Χ Sackng he level and he dfference equaons, we defne y y y * * * X X W d I D L Z n whch L s he marx of GMM-ype nsrumens for he equaon n levels gven by (B.6), D s he marx of GMM-ype nsrumens for he equaon n dfferences gven by (B.4), and I d s he marx of. 3,...,, 0,,2, 2, T w E y E

31 30 sandard nsrumens used n he equaon n dfferences gven by (B.8). The Blundell and Bond GMM heeroskedascy-robus esmaor s y Z A W Z Z W A W Z 1 ˆ n whch 1 ˆ ˆ Z Z A s a weghng marx ha uses he frs-sep resduals ˆ from an nal conssen esmaor (see Blundell, Bond and Wndmeer (2000) for deals).

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37 Table 1 Summary Sascs Ths able presens summary sascs for he sample used n hs sudy. Our man daa source s he CRSP- COMPUSTAT Merged daabase of frm-level annual daa on dollar payous for US lsed frms reporng posve payous durng he perod We exclude regulaed ules, fnancal frms, and frms whch have a share code n CRSP dfferen from 10 or 11. We ake all open marke repurchase program announcemens from he Secures Daa Corporaon (SDC) daabase and collec he dollar value of repurchases from COMPUSTAT for only hose years n whch here was an announcemen n SDC n ha year or n one of he prevous wo years (Jagannahan e al., 2000). We exclude he year 1987 for frm year observaons and he las quarer of 1987 for announcemen daa (e.g. Ikenberry, Lakonshok and Vermaelen, 1995; Grullon and Mchaely, 2002). We oban from he CRSP Monhly Socks even fle all declaraon evens wh codes equal o 1232 (ordnary quarerly dvdends) wh non-mssng declaraon daes. Followng Amhud and L (2006) we ake only hose dvdend ncreases where he change n he dvdend per share amoun s a leas 0.5%. Panel A presens he summary sascs daa for our frm-level panel. Panel B shows he summary sascs around announcemens of payou changes (repurchases and dvdend ncreases). Varable defnons and sources are provded n Appendx A. The symbols ***,**,* denoe sgnfcance levels of 1%, 5% and 10%, respecvely, for he -es (rank sum es) ha he means (medans) are equal across he wo sub-samples. 36

38 Table 1 (con.) Summary Sascs Panel A: Summary sascs, frm-year observaons Varable N Mean Sd. Dev. Q1 Medan Q3 Repurchases Amoun 25, Dvdend Amoun 25, Toal Payou 25, Dvdend Increase 25, Share of Repurchases n Toal Payou 25, Share of Rep. n Payou Increasng Frms 22, Invesor Turnover 25, Insuonal Ownershp (I.O.) 25, I.O. of Hgh Turnover Invesors 25, I.O. of Medum Turnover Invesors 25, I.O. of Low Turnover Invesors 25, Sze 25, Marke-o-Book Rao 25, Deb-o-Equy Rao 25, Operang Income 25, Non-Operang Income 25, Sd. Dev. Of Operang Income 25, Lqud Asses 25, Pror Payou Rao 25, Las 12 Monhs' Reurn 25, Las 12 Monhs' Share Turnover 25, Illqudy 25, Number of Analyss 25, Manageral Holdngs 11, Manageral Sock Opons 10, GIM Governance Index 12,

39 Table 1 (con.) Summary Sascs Panel B: Summary sascs for frms announcng payou changes Varable All even frms Repurchasng frms Dvdend-ncreasng frms N Mean Sd. Dev. Q1 Medan Q3 N Mean Medan N Mean Medan Invesor Turnover 17, , , *** *** Insuonal Ownershp (I.O.) 17, , , *** *** I.O. of Hgh Turnover Invesors 17, , , *** *** I.O. of Medum Turnover Invesors 17, , , *** *** I.O. of Low Turnover Invesors 17, , , *** *** Sze 17, , , *** *** Marke-o-Book Rao 17, , , *** *** Deb-o-Equy Rao 17, , , *** *** Operang Income 17, , , *** *** Non-Operang Income 17, , , Sd. Dev. Of Operang Income 17, , , *** *** Lqud Asses 17, , , *** *** Pror Payou Rao 17, , , *** *** Las 12 Monhs' Reurn 17, , , *** *** Las 12 Monhs' Share Turnover 17, , , *** *** Illqudy 17, , , *** *** Number of Analyss 17, , , *** *** Manageral Holdngs 8, , , Manageral Sock Opons 7, , , *** *** GIM Governance Index 9, , , *** *** Cumulave Abnormal Reurn (-1,+1) 17, , , *** *** Sze of Repurchase 8, ,

40 Table 2. Shareholder Invesmen Horzons and he Share of Repurchases n Payou Ths able presens Tob regresson resuls of he relaon beween he share of payou n he form of repurchases and nvesor urnover. Our sample s composed of frms reporng posve payous. In Panel A he dependen varable s he Share of Repurchases o Toal Payou, he rao of dollar repurchases o Toal Payou (dvdends plus repurchases). In Panel B he dependen varable s he Share of Repurchase n Payou-Increasng Frms, he rao beween Repurchases Amoun and he sum (Repurchases Amoun + Dvdend Increase). Dvdend Increase s he dollar posve change n dollar dvdends. Please refer o Appendx A for defnons and deals on he consrucon of all varables. Column 1 presens our basc specfcaon and column 2 shows our exended specfcaon wh execuve compensaon and governance daa. Columns 3 and 4 repea he analyss usng as man ndependen varable he lagged fracon of a frm's shares held by nvesors n he op (mddle/boom) 33rd percenle of nsuonal nvesor's urnover raes. Columns 5 and 6 presen resuls of neracng Invesor Turnover wh frms wh Hgh Analyss' Forecas Errors and Hgh Dsperson of Opnon, respecvely. Analys Forecas Error (AFE) s he yearly average of he monhly (acual EPS average forecas EPS) / average forecas EPS. Dsperson of Opnon (DOP) s he rao beween he sandard devaon of analyss EPS forecass and he absolue value of he average EPS forecas. We defne ndcaor varables called Hgh AFE (Hgh DOP) ha ake he value of 1 f he frm's AFE (DOP) s above he sample medan n a gven year, and 0 oherwse. Regressons nclude ndusry dummes and yearly dummes. Indusres are defned usng he Fama and French (1992) classfcaon. We use sandard errors clusered by frm o accommodae heeroscekedascy and whn-frm auocorrelaon. T- sascs are repored n parenheses and he symbols ***, **, * denoe sgnfcance a 1%, 5% and 10%. 39

41 Panel A: Dependen varable s Share of Repurchases n Toal Payou (1) (2) (3) (4) (5) (6) Invesor Turnover *** *** *** *** (6.28) (3.46) (-6.86) (-6.99) IO of Hgh Turnover Invesors *** ** (4.33) (2.27) IO of Md Turnover Invesors (0.91) (0.20) IO of Low Turnover Invesors ** (-2.12) (-1.38) Insuonal Ownershp (IO) (1.35) (0.37) (-1.32) (-0.76) Sze *** * *** *** *** (-8.45) (-1.76) (-7.87) (-1.57) (-7.96) (-7.19) Marke-o-Book Rao (0.56) (-0.82) (0.76) (-0.81) (-0.45) (-0.50) Deb-o-Equy Rao (1.17) (-0.33) (0.98) (-0.27) (-1.23) (-0.69) Operang Income *** *** *** *** (-5.18) (0.94) (-5.08) (1.02) (-4.84) (-4.65) Non-Operang Income (1.60) (1.40) (1.52) (1.34) (-1.34) (-1.50) Sd. Dev. Of Op. Income *** ** *** ** *** *** (3.69) (2.24) (3.64) (2.21) (-3.58) (-3.14) Lqud Asses 0.36 ** * ** * ** ** (2.43) (1.87) (2.45) (1.89) (-2.35) (-2.48) Pror Payou Rao (-1.62) (-0.37) (-1.60) (-0.31) (-1.55) (-1.38) Las 12 Mhs. Reurn *** *** *** *** (-5.91) (-0.44) (-6.02) (-0.49) (-6.63) (-5.31) Las 12 Mhs. Share Turnover *** *** *** 0.2 *** *** *** (4.17) (7.99) (4.19) (8.02) (-4.07) (-11.77) Illqudy (0.67) (-0.21) (0.85) (-0.33) (-0.73) (-1.48) Number of Analyss 0.03 *** *** 0.03 *** *** *** *** (7.32) (2.69) (7.34) (2.71) (-7.19) (-6.53) Manageral Holdngs * * (-1.75) (-1.86) Manageral Sock Opons *** 0.67 *** (6.88) (6.90) GIM Governance Index *** *** (-3.93) (-3.90) Inv. Turnover x AFE * (1.73) Analyss' Forecas Errors (AFE) (1.02) Inv. Turnover x DOP ** (1.98) Dsperson of Opnon (DOP) * (1.70) Inercep *** * *** 0.82 *** *** *** (6.21) (1.75) (7.45) (2.62) (-5.78) (-5.01) Indusry and me dummes Yes Yes Yes Yes Yes Yes N 25,197 8,777 25,197 8,777 24,524 21,391 R-squared

42 Panel B: Dependen varable s Share of Repurchases n Payou-Increasng Frms (1) (2) (3) (4) (5) (6) Invesor Turnover *** *** *** *** (6.28) (3.34) (4.76) (4.71) IO of Hgh Turnover Invesors *** * (4.00) (1.91) IO of Md Turnover Invesors (0.49) (-0.17) IO of Low Turnover Invesors * ** (-1.77) (-2.21) Insuonal Ownershp (IO) (1.05) (-0.54) (1.25) (0.83) Sze *** *** *** *** (-5.14) (0.07) (-4.72) (0.28) (-4.89) (-4.32) Marke-o-Book Rao (0.53) (-0.43) (0.67) (-0.41) (0.60) (0.47) Deb-o-Equy Rao (0.64) (-0.87) (0.50) (-0.82) (0.53) (0.31) Operang Income *** *** *** *** (-5.44) (0.98) (-5.35) (1.07) (-4.85) (-3.94) Non-Operang Income * * * ** (1.75) (1.27) (1.67) (1.21) (1.73) (2.09) Sd. Dev. Of Op. Income *** *** *** *** *** *** (5.05) (3.84) (4.99) (3.83) (4.83) (3.85) Lqud Asses ** * ** ** 0.55 *** *** (2.52) (1.93) (2.53) (1.97) (2.59) (2.65) Pror Payou Rao (-1.05) (0.41) (-1.02) (0.46) (-1.01) (-0.66) Las 12 Mhs. Reurn *** *** *** *** *** *** (-10.37) (-5.66) (-10.32) (-5.70) (-10.22) (-9.39) Las 12 Mhs. Share Turnover *** *** *** *** *** *** (3.86) (7.95) (3.89) (7.99) (3.83) (10.55) Illqudy * ** * (1.53) (-0.85) (1.69) (-0.97) (1.98) (1.87) Number of Analyss *** *** *** *** (4.82) (1.05) (4.84) (1.07) (4.88) (4.42) Manageral Holdngs ** ** (-2.29) (-2.41) Manageral Sock Opons *** *** (5.24) (5.22) GIM Governance Index *** *** (-3.21) (-3.18) Inv. Turnover x AFE *** (3.48) Analyss' Forecas Errors (AFE) (0.80) Inv. Turnover x DOP 0.46 *** (2.70) Dsperson of Opnon (DOP) ** (2.19) Inercep *** *** ** *** 1.49 *** (5.76) (1.16) (7.08) (2.05) (5.46) (4.69) Indusry and me dummes Yes Yes Yes Yes Yes Yes N 22,495 7,942 22,495 7,942 22,350 19,659 R-squared

43 Table 3. Shareholder Invesmen Horzons and he Lkelhood of a Repurchase Ths able presens Prob regresson resuls of he relaon beween he lkelhood of a repurchase and nvesor urnover. The dependen varable akes a value of 1 f a frm makes an open marke share repurchase announcemen and a value of 0 for a dvdend ncrease announcemen. Please refer o Appendx A for defnons and deals on he consrucon of all varables. Column 1 (2) presens our basc (exended) specfcaon. Columns 3 and 4 repea he analyss usng as man ndependen varable he lagged fracon of a frm's shares held by nvesors n he op (mddle/boom) 33rd percenle of nsuonal nvesor's urnover raes. Columns 5 and 6 presen resuls of neracng Invesor Turnover wh frms wh Hgh Analyss' Forecas Errors and Hgh Dsperson of Opnon, respecvely. Analys Forecas Error (AFE) s he yearly average of he monhly (acual EPS average forecas EPS) / average forecas EPS. Dsperson of Opnon (DOP) s he rao beween he sandard devaon of analyss EPS forecass and he absolue value of he average EPS forecas. We defne ndcaor varables called Hgh AFE (Hgh DOP) ha ake he value of 1 f he frm's AFE (DOP) s above he sample medan n a gven year, and 0 oherwse. Regressons nclude ndusry dummes and yearly dummes. Indusres are defned usng he Fama and French (1992) classfcaon. We use sandard errors clusered by frm o accommodae heeroscekedascy and whn-frm auocorrelaon. T-sascs are repored n parenheses and he symbols ***, **, * denoe sgnfcance a 1%, 5% and 10%. 42

44 Dependen Varable: Dummy equal o 1 for a Repurchase announcemen and equal o 0 for a Dvdend ncrease announcemen (1) (2) (3) (4) (5) (6) Invesor Turnover *** *** *** *** (5.34) (2.63) (4.53) (5.22) IO of Hgh Turnover Invesors *** 1.08 *** (5.45) (3.06) IO of Md Turnover Invesors (1.52) (1.44) IO of Low Turnover Invesors ** (-2.48) (-1.02) Insuonal Ownershp (IO) ** ** (1.61) (1.61) (2.01) (2.21) Sze *** ** *** * *** *** (-7.51) (-2.10) (-6.76) (-1.74) (-7.08) (-6.23) Marke-o-Book Rao * * ** ** (1.93) (-0.06) (1.93) (-0.01) (2.02) (1.97) Deb-o-Equy Rao * ** (1.08) (1.96) (0.95) (1.97) (0.97) (0.75) Operang Income *** *** *** *** *** *** (-11.58) (-3.13) (-11.26) (-2.94) (-10.78) (-9.76) Non-Operang Income (0.11) (1.43) (0.08) (1.39) (0.09) (0.53) Sd. Dev. Of Op. Income *** *** *** *** *** *** (5.29) (4.47) (5.15) (4.45) (5.10) (5.96) Lqud Asses (-0.07) (-0.14) (-0.01) (-0.08) (-0.04) (0.24) Pror Payou Rao (-1.57) (-0.75) (-1.49) (-0.56) (-1.57) (-1.47) Las 12 Mhs. Reurn *** *** *** *** *** *** (-9.27) (-3.12) (-9.58) (-3.27) (-9.63) (-8.53) Las 12 Mhs. Share Turnover *** *** *** 0.22 *** *** *** (9.88) (7.32) (9.75) (7.22) (9.78) (8.84) Illqudy *** *** (1.49) (-0.03) (1.56) (-0.07) (3.29) (3.17) Number of Analyss *** *** *** *** (4.66) (1.04) (4.73) (1.10) (4.64) (3.88) Manageral Holdngs (-1.25) (-1.46) Manageral Sock Opons *** *** (4.26) (4.17) GIM Governance Index *** *** (-2.93) (-2.91) Inv. Turnover x AFE *** (3.52) Analyss' Forecas Errors (AFE) (1.28) Inv. Turnover x DOP *** (4.63) Dsperson of Opnon (DOP) (1.07) Inercep *** ** 1.43 *** 0.92 *** *** *** (5.91) (2.00) (7.08) (2.76) (5.35) (4.25) Indusry and me dummes Yes Yes Yes Yes Yes Yes N 17,604 6,711 17,604 6,711 17,417 15,863 R-squared

45 Table 4. Shareholder Invesmen Horzons and he Marke Reacon o Repurchase Announcemens Ths able presens regresson resuls of he relaon beween he sock marke's reacon o a repurchase announcemen and nvesor urnover. The dependen varable s he Cumulave Abnormal Reurn (CAR) for he daly wndow (-1, +1) s measured agans he CRSP value-weghed ndex. Please refer o Appendx A for defnons and deals on he consrucon of all varables. Column 1 (2) presens our basc (exended) specfcaon. Columns 3 and 4 repea he analyss usng as man ndependen varable he lagged fracon of a frm's shares held by nvesors n he op (mddle/boom) 33rd percenle of nsuonal nvesor's urnover raes. Columns 5 and 6 presen resuls of neracng Invesor Turnover wh frms wh Hgh Analyss' Forecas Errors and Hgh Dsperson of Opnon, respecvely. Analys Forecas Error (AFE) s he yearly average of he monhly (acual EPS average forecas EPS) / average forecas EPS. Dsperson of Opnon (DOP) s he rao beween he sandard devaon of analyss EPS forecass and he absolue value of he average EPS forecas. We defne ndcaor varables called Hgh AFE (Hgh DOP) ha ake he value of 1 f he frm's AFE (DOP) s above he sample medan n a gven year, and 0 oherwse. Regressons nclude ndusry dummes and yearly dummes. Indusres are defned usng he Fama and French (1992) classfcaon. We use sandard errors clusered by frm o accommodae heeroscekedascy and whn-frm auocorrelaon. T-sascs are repored n parenheses and he symbols ***, **, * denoe sgnfcance a 1%, 5% and 10%. 44

46 Dependen Varable: Cumulave Abnormal Reurn wh wndow (-1,+1) around Repurchase announcemens (1) (2) (3) (4) (5) (6) Invesor Turnover ** *** *** * (-2.29) (-2.79) (-3.15) (-1.91) IO of Hgh Turnover Invesors *** ** (-4.84) (-2.36) IO of Md Turnover Invesors * (-1.68) (-0.45) IO of Low Turnover Invesors (-0.47) (0.71) Sze of Repurchase *** *** *** *** *** *** (3.36) (2.94) (3.58) (3.10) (3.28) (2.67) Insuonal Ownershp (IO) *** *** *** (-3.31) (-0.50) (-3.14) (-2.70) Sze *** *** *** ** (-3.00) (-0.84) (-3.85) (-0.88) (-2.97) (-2.22) Marke-o-Book Rao (1.18) (-1.07) (0.90) (-0.99) (1.12) (0.26) Deb-o-Equy Rao ** * ** (-1.31) (2.18) (0.18) (1.90) (-1.39) (-1.97) Operang Income * (-1.67) (0.08) (-1.26) (0.04) (-1.26) (-1.15) Non-Operang Income ** (-0.84) (-1.02) (-2.01) (-1.11) (-0.73) (-0.03) Sd. Dev. Of Op. Income * (1.55) (1.29) (1.95) (1.20) (1.39) (1.61) Lqud Asses ** ** ** * (-2.22) (-1.59) (-2.53) (-1.59) (-2.26) (-1.74) Pror Payou Rao * * (0.64) (1.72) (0.82) (1.23) (0.65) (1.92) Las 12 Mhs. Reurn *** *** *** *** (-4.46) (-1.19) (-4.26) (-1.15) (-4.44) (-3.55) Las 12 Mhs. Share Turnover ** ** ** ** (2.42) (1.44) (2.08) (1.42) (2.32) (2.03) Illqudy ** *** ** *** ** * (2.23) (3.06) (2.29) (3.17) (2.07) (1.65) Number of Analyss (0.32) (0.75) (0.95) (0.78) (0.07) (0.32) Manageral Holdngs (0.45) (0.44) Manageral Sock Opons (-0.55) (-0.43) GIM Governance Index (0.62) (0.61) Inv. Turnover x AFE ** (2.34) Analyss' Forecas Errors (AFE) (0.49) Inv. Turnover x DOP * (1.67) Dsperson of Opnon (DOP) (0.85) Inercep *** *** *** *** (4.87) (1.53) (5.54) (0.37) (4.68) (3.02) Indusry and me dummes N 8,041 3,120 7,694 3,120 7,986 7,201 R-squared

47 Table 5. Shareholder Invesmen Horzons and he Level of Payou Ths able presens regresson resuls of he relaon beween he amoun of boh repurchases and dvdends, and nvesor urnover. Our sample s composed of frms reporng posve payous. In Column 1 hrough 3 he dependen varable s he Log of (1+Repurchases Amoun). Column 1 (2) uses Invesor Turnover as he man ndependen varable and our basc (exended) regresson specfcaon. Column 3 uses our exended specfcaon and IO of Hgh, Md, and Low Invesor Turnover as he man ndependen varables. Ths paern s smlar for columns 4 hrough 6, bu usng as dependen varable he logarhm of 1 + he annual dollar value of dvdends. Please refer o Appendx A for defnons and deals on he consrucon of all varables. Regressons nclude ndusry dummes and yearly dummes. Indusres are defned usng he Fama and French (1992) classfcaon. We use sandard errors clusered by frm o accommodae heeroscekedascy and whn-frm auocorrelaon. T- sascs are repored n parenheses and he symbols ***, **, * denoe sgnfcance a 1%, 5% and 10%. 46

48 Invesor Turnover and he Level of Payou Dependen Varable: Log of (1 + Repurchase Amoun) Log of (1 + Dvdend Amoun) (1) (2) (3) (4) (5) (6) Invesor Turnover ** ** *** *** (2.21) (2.00) (-7.82) (-5.72) IO of Hgh Turnover Invesors * *** (1.71) (-6.39) IO of Md Turnover Invesors *** (-1.54) (-5.11) IO of Low Turnover Invesors ** (0.12) (2.20) Insuonal Ownershp (IO) ** *** *** (2.26) (0.08) (-6.70) (-3.18) Sze *** *** *** *** *** *** (14.51) (9.38) (9.29) (40.83) (27.10) (26.56) Marke-o-Book Rao *** *** *** *** (3.51) (0.38) (0.33) (6.40) (4.77) (4.57) Deb-o-Equy Rao *** * * *** *** *** (-2.61) (-1.83) (-1.75) (-5.20) (-3.90) (-3.89) Operang Income *** *** *** *** *** *** (9.52) (7.90) (7.91) (13.00) (10.61) (10.39) Non-Operang Income 4.03 *** *** *** *** *** *** (3.57) (3.27) (3.21) (6.02) (3.64) (3.69) Sd. Dev. Of Op. Income *** * * * ** * (4.01) (1.86) (1.87) (1.82) (-1.97) (-1.89) Lqud Asses *** *** *** ** ** ** (4.41) (2.94) (2.94) (2.45) (2.02) (1.98) Pror Payou Rao * (-0.62) (0.26) (0.30) (1.78) (0.95) (0.92) Las 12 Mhs. Reurn *** *** *** *** * (5.26) (4.31) (4.27) (7.83) (1.52) (1.89) Las 12 Mhs. Share Turnover *** *** 0.12 *** *** *** *** (4.84) (3.43) (3.55) (-6.54) (-9.70) (-9.57) Illqudy *** ** * *** ** *** (6.32) (1.98) (1.94) (6.13) (2.31) (2.68) Number of Analyss 0.03 *** *** *** *** (6.28) (3.31) (3.28) (4.02) (-0.86) (-1.03) Manageral Holdngs *** *** (-2.76) (-2.82) (-1.50) (-1.35) Manageral Sock Opons *** 0.97 *** *** *** (5.66) (5.76) (-7.40) (-7.33) GIM Governance Index *** *** *** *** (-2.79) (-2.79) (5.66) (5.63) Inercep *** *** *** *** *** *** (-9.09) (-10.75) (-10.59) (-13.17) (-9.31) (-9.90) Indusry and me dummes Yes Yes Yes Yes Yes Yes N 25,197 8,777 8,777 25,197 8,777 8,777 R-squared

49 Table 6. Causaly Analyss Ths able presens dynamc panel esmaes of he causal relaon beween he share of payou n he form of repurchases and nvesor urnover. We use he generalzed-mehod-of-momens dynamc panel daa esmaor of Blundell and Bond (1998). Please refer o Appendx A for deals on varable consrucon and Appendx B for deals on he esmaon procedure. In Panel A, column 1, he dependen varable, Share of Repurchases o Toal Payou, s regressed on s lag and on lagged Invesor Turnover. In Panel A, column 2, he dependen varable s Invesor Turnover whch s regressed on s lag and on lagged Share of Repurchases o Toal Payou. All conrol varables of our basc specfcaon (cf. Table 2) are used (parameer esmaes no shown). Columns 3 and 4 are smlar excep ha hey use our exended specfcaon. In Panel B Share of Repurchases n Payou- Increasng Frms s used as endogenous varable along wh Invesor Turnover. The able shows he p-value of he hypohess es ha he frs-dfferenced resduals are auocorrelaed of order 2, and he p-value of he Sargan es of he null hypohess of valdy of he over-denfyng momen condons. T-sascs are repored n parenheses and he symbols ***, **, * denoe sgnfcance a 1%, 5% and 10%. Panel A: Causaly Analyss of Share of Repurchases n Toal Payou and Invesor Turnover Specfcaon: Basc Se of Conrols Exended Se of Conrols Dependen Varable: Share of Repurchases n Toal Payou Invesor Turnover Share of Repurchases n Toal Payou Invesor Turnover (1) (2) (3) (4) Lag Share of Repurchases n Toal Payou 0.371*** *** (11.01) (0.22) (12.57) (0.93) Lag Invesor Turnover 0.788** 0.119* 0.515** (2.08) (1.83) (1.99) (0.29) N 18,604 18,604 7,838 7,838 P-Value of AR(2) es P-value of Sargan es Panel B: Causaly Analyss of Share of Repurchases n Payou Increasng Frms and Invesor Turnover Specfcaon: Basc Se of Conrols Exended Se of Conrols Dependen Varable: Share of Repurchases n Payou Increasng Frms Invesor Turnover Share of Repurchases n Payou Increasng Frms Invesor Turnover (1) (2) (3) (4) Lag Share of Repurchases n Payou-Increasng Frms 0.460*** ** (12.19) (-0.13) (8.25) (0.13) Lag Invesor Turnover 1.063** 0.094* 0.278* 0.05 (2.14) (1.86) (1.70) (0.75) N 15,377 15,377 6,612 6,612 P-Value of AR(2) es P-value of Sargan es

50 Table 7. Esmaes adjusng for Sample Selecon Ths able presens resuls of replcang he man resuls adjusng for sample selecon. All specfcaons presened are he second sage of a wo-sage Heckman (1979) sample-selecon model. The frs sage of he selecon model s esmaed n he unverse of CRSP-COMPUSTAT frms for whch daa on our varables exss (he frs sage esmaon resuls are presened n Table 8). Columns 1 and 2 replcaes he column 1 and 2 of Table 2. Columns 3 and 4 replcaes he column 1 and 2 of Table 3. Columns 5 and 6 replcaes he column 1 and 2 of Table 4. Please refer o Appendx A for defnons and deals on he consrucon of all varables. Regressons nclude ndusry dummes and yearly dummes. Indusres are defned usng he Fama and French (1992) classfcaon. We use sandard errors clusered by frm o accommodae heeroscekedascy and whn-frm auocorrelaon. T-sascs are repored n parenheses and he symbols ***, **, * denoe sgnfcance a 1%, 5% and 10%. 49

51 Esmaon adjusng for Sample Selecon Dependen Varable: Share of Repurchases n Toal Payou Dummy equal o 1 for a Repurchase announcemen CAR wh wndow (-1,+1) around Repurchase announcemens (1) (2) (3) (4) (3) (4) Invesor Turnover ** * *** *** *** *** (2.63) (1.88) (3.69) (3.64) (-3.86) (-4.64) Sze of Repurchase *** *** (3.46) (3.60) Insuonal Ownershp (IO) *** *** * *** (5.85) (1.48) (3.28) (1.81) (-3.97) (-0.17) Sze *** *** *** (5.28) (8.29) (-5.62) (-0.92) (-0.98) (-0.22) Marke-o-Book Rao (0.19) (0.29) (-0.26) (1.22) (0.82) (-0.71) Deb-o-Equy Rao *** *** * *** *** (-2.74) (-2.82) (-1.72) (3.45) (-3.20) (0.10) Operang Income *** *** *** (9.48) (10.51) (-8.18) (-1.03) (-1.35) (0.23) Non-Operang Income *** *** (8.11) (6.56) (0.16) (1.30) (0.18) (-0.87) Sd. Dev. Of Op. Income *** *** * (0.83) (0.91) (5.03) (4.01) (1.46) (1.80) Lqud Asses *** *** ** (4.53) (4.56) (-0.84) (-0.59) (-2.12) (-1.45) Pror Payou Rao *** (-3.60) (-0.30) (-0.33) (-1.04) (-0.04) (0.38) Las 12 Mhs. Reurn *** *** *** *** (-5.54) (0.75) (-10.06) (-3.54) (-6.26) (-1.61) Las 12 Mhs. Share Turnover *** *** *** *** *** * (22.66) (14.90) (-8.44) (-7.21) (2.98) (1.80) Illqudy *** *** *** (0.73) (-4.88) (-0.59) (0.67) (3.57) (6.36) Number of Analyss *** * *** (7.65) (1.96) (-4.87) (-1.39) (-0.37) (0.88) Manageral Holdngs *** * (-3.44) (1.67) (1.02) Manageral Sock Opons *** (9.40) (-1.04) (-0.22) GIM Governance Index *** *** (-3.69) (-3.10) (0.33) Heckman's Lambda *** *** *** * ** (3.89) (6.70) (3.06) (1.95) (2.31) (0.01) Inercep *** *** *** *** (-4.45) (-4.82) (-4.92) (-3.47) (0.43) Indusry and me dummes Yes Yes Yes Yes Yes Yes N 25,169 8,774 17,580 6,701 9,270 3,421 R-squared

52 Table 8. Shareholder Invesmen Horzons and Lkelhood of Payou among Non-Payng Frms Ths able presens Prob regresson resuls of he relaon beween he lkelhood of a payou among non-payng frms and nvesor urnover. The relaon s esmaed n he unverse of CRSP-COMPUSTAT frms for whch daa on our varables exss (and no only n he sample of frms reporng posve payous as s he case n he prevous ables). To help denfy he equaons (necessary o esmae he second-sage regressons shown n Table 7), we add wo varables o our basc specfcaon. Sales Growh s he average of he pas hree years' percenage change n sales (COMPUSTAT em SALE). Log of Frm Age s he lagged naural logarhm of he me n years snce he frm frs eners he COMPUSTAT daabase. All oher rgh-hand sde varables are defned as n prevous ables. Please refer o Appendx A for defnons and deals on he consrucon of all varables. In Panel A, columns 1 and 2, he dependen varable akes a value of 1 f a frm makes an open marke share repurchase announcemen n a gven year and 0 oherwse. In Panel A, columns 3 and 4, he dependen varable akes a value of 1 f a frm pays a dvdend n a gven year and 0 oherwse. In Panel A, columns 5 and 6, he dependen varable akes a value of 1 f a frm has a posve payou (ha s, makes an open marke share repurchase announcemen or pays a dvdend) n a gven year and 0 oherwse. Panel B looks a payou naon behavor. In columns 1 and 2, he dependen varable akes a value of 1 f a frm makes an open marke share repurchase announcemen for he frs me durng he sample perod and 0 oherwse. In columns 3 and 4, he dependen varable akes a value of 1 f a frm pays a dvdend for he frs me durng he sample perod and 0 oherwse. To consruc hese naon ndcaors we exclude he frs year n whch a frm frs appears n he sample. Regressons nclude ndusry dummes and yearly dummes. Indusres are defned usng he Fama and French (1992) classfcaon. We use sandard errors clusered by frm o accommodae heeroscekedascy and whn-frm auocorrelaon. T-sascs are repored n parenheses and he symbols ***, **, * denoe sgnfcance a 1%, 5% and 10%. 51

53 Panel A: Invesor Turnover and Lkelhood of Payou Dependen Varable: Dummy equal o 1 f Frm Repurchases, 0 oherwse Dummy equal o 1 f Frm pays Dvdends, 0 oherwse Dummy equal o 1 f a Frm has posve Payou, 0 oherwse (1) (2) (3) (4) (5) (6) Invesor Turnover ** *** *** (2.03) (-6.88) (-3.24) IO of Hgh Turnover Invesors * *** *** (1.86) (-3.88) (-3.58) IO of Md Turnover Invesors * (-0.34) (-1.41) (-1.96) IO of Low Turnover Invesors *** *** *** (5.62) (5.58) (7.29) Insuonal Ownershp (IO) *** ** (4.46) (1.15) (2.24) Sze *** *** *** *** *** *** (10.43) (9.88) (16.22) (15.39) (17.89) (16.97) Marke-o-Book Rao *** *** (0.29) (0.08) (1.63) (1.51) (3.69) (3.43) Deb-o-Equy Rao ** ** *** *** *** *** (-2.48) (-2.44) (-4.96) (-4.85) (-4.56) (-4.54) Operang Income *** *** *** *** *** *** (20.20) (20.07) (17.43) (17.24) (21.43) (21.25) Non-Operang Income *** 5.25 *** *** *** *** *** (8.66) (8.57) (3.86) (3.86) (7.97) (7.91) Sd. Dev. Of Op. Income *** *** ** ** (-0.86) (-0.79) (-5.09) (-5.09) (-2.28) (-2.29) Lqud Asses *** *** *** *** *** *** (6.82) (6.79) (2.83) (2.83) (8.00) (7.96) Pror Payou Rao ** ** ** ** (0.67) (0.65) (2.14) (2.14) (2.27) (2.27) Las 12 Mhs. Reurn *** *** *** *** (-5.01) (-4.61) (7.34) (7.59) (0.29) (0.85) Las 12 Mhs. Share Turnover *** *** *** *** *** *** (-4.66) (-4.38) (-9.73) (-9.71) (-9.30) (-9.18) Illqudy *** *** *** *** *** *** (-2.91) (-3.21) (-2.70) (-2.91) (-5.02) (-5.34) Number of Analyss *** *** ** ** (2.76) (2.65) (-2.36) (-2.35) (-0.32) (-0.46) Sales growh *** *** *** *** ** ** (6.17) (6.05) (7.91) (8.19) (2.08) (2.37) Log of Frm age *** *** *** *** *** *** (6.54) (6.18) (20.91) (20.63) (21.39) (21.06) Inercep *** *** *** *** *** *** (-16.71) (-16.73) (-19.55) (-20.71) (-20.73) (-21.74) Indusry and me dummes Yes Yes Yes Yes Yes Yes N 52,648 52,648 52,648 52,648 52,648 52,648 R-squared

54 Panel B: Invesor Turnover and Lkelhood of Payou Inaon Dependen Varable: Dummy equal o 1 f Frm makes a Repurchase for he frs me, 0 oherwse Dummy equal o 1 f Frm pays a Dvdend for he frs me, 0 oherwse (1) (2) (3) (4) Invesor Turnover *** (3.06) (-0.18) IO of Hgh Turnover Invesors *** (4.93) (1.56) IO of Md Turnover Invesors *** (3.35) (1.03) IO of Low Turnover Invesors (0.39) (-0.89) Insuonal Ownershp (IO) *** (6.32) (1.18) Sze * (-1.07) (-0.48) (1.43) (1.71) Marke-o-Book Rao (0.44) (0.56) (-0.40) (-0.30) Deb-o-Equy Rao (-1.28) (-1.40) (-0.32) (-0.39) Operang Income *** *** *** *** (10.31) (10.38) (4.86) (4.88) Non-Operang Income *** ** * * (2.59) (2.56) (1.72) (1.75) Sd. Dev. Of Op. Income (-0.49) (-0.50) (0.53) (0.39) Lqud Asses *** 0.33 *** * * (5.88) (5.98) (1.83) (1.88) Pror Payou Rao ** ** (0.68) (0.72) (-2.35) (-2.32) Las 12 Mhs. Reurn *** *** (-0.96) (-0.92) (4.37) (4.23) Las 12 Mhs. Share Turnover * 0.01 * (1.79) (1.89) (-0.43) (-0.54) Illqudy *** *** (-2.84) (-2.85) (0.13) (0.27) Number of Analyss *** *** ** * (5.60) (5.75) (-2.01) (-1.87) Sales growh *** *** *** *** (10.31) (10.31) (12.70) (12.70) Log of Frm age *** *** *** *** (-14.97) (-14.71) (-7.62) (-7.44) Inercep *** *** *** *** (-15.76) (-15.83) (-13.71) (-14.51) Indusry and me dummes Yes Yes Yes Yes N 50,823 50,823 50,454 50,454 R-squared