Survey Evidence

Instead of researching in the data as to what CFOs are actually doing, we can also just try to ask them. A 2004 paper by Brav, Graham, Harvey, and Michaely does exactly this, surveying 384 financial executives. This kind of evidence is not a substitute for but a complement to the empirical evidence. Managers may respond to immediate financial market pressures and incentives without fully realizing their underlying causes. The proverbial grain of salt is appropriate.

Here are the easily The CFOs in this study have some very definite and interesting opinions: understandable

°pini°ns. . They state that they pay dividends because they are trapped by history. They do not want to cut existing dividends, but given the choice, they would not begin paying dividends. In fact, their desire not to cut dividends goes so far that they claim that they would not only raise more external capital but even pass up positive NPV projects to pay them. They claim not to care at all about investment opportunities when it comes to dividends.

• In contrast, they do care about investment opportunities and residual cash left over when it comes to share repurchases. In fact, they seem to think of their own stock as an investment opportunity in that they try to earn money by attempting to time their own stock, buying more shares when the price seems low.

• 40% of these managers want to attract institutional investors with dividends—but they also believe that they can do this either with repurchases or with share repurchases.

• 40% of these executives target a dividend/share ratio (and 27% target changes therein), 28% target a dividend-earnings payout ratio, and 14% target a dividend-price ratio. When it comes to share repurchases, they tend to target a dollar value of repurchases, not any particular ratio.

The market also responds to stock splits.

What do the decision makers themselves believe?

• Repurchases are often related to option or stock compensation plans, providing the firm with the shares needed to satisfy their employee obligations.

• Repurchases offer a flexibility that dividends do not. Managers perceive this to be a good thing and would argue that it creates value for the company.

• However, as I noted in the discussion of the survey in Section 21-3, managerial answers are in line with what one would expect if they were agency-conflicted—that is, interested first in helping themselves. This is not to say that executives deliberately plot how to enrich themselves, but that over time their views tend to evolve towards what is in their own interests. Although reinvestment increases the share price and firm size, payout only helps anonymous investors far away from the firm, who own less of the firm after the payout, and this diminishes the share price and firm size. Thus payouts are less salient to managers.

• Further evidence of an agency conflict is that dividend paying financial executives state that they would most like to use the money saved by a hypothetical dividend elimination not for a share repurchase (the obvious substitute), but for paying down debt. Avoiding bond rating downgrades and retaining financial flexibility is important to CFOs—again, this would reduce external pressure on management.

So far, so good. Now it becomes a bit stranger. Only one-third of the respondents contem- Here are the more plate personal income tax consequences, though 40% realize the relevant repurchase advantage. However, if they recognize it, they rarely consider their investors' personal income tax consequences to be important to their payout decisions. This finding may not be too strange, because differential tax consequences are rather modest today.

However, here is where it gets truly strange: Here are the very difficult to understand

• Many CFOs believe that repurchases automatically increase earnings-per-share, as if money °Pini°ns-paid out would not otherwise create more earnings. This is contrary to what you learned on Page 611.

• Clearly, dividends are related to the stability of future earnings, and CFOs recognize this fact. They also know that they take future earnings into account when they decide on dividends. Alas, they then claim that there is no additional discipline imposed by dividend payments, and they claim that dividends and repurchases convey similar information. This is inconsistent. Moreover, they believe that it is unimportant that payout and especially dividends convey information to the market. Again, this is odd, because they state that they pay out dividends depending on their opinion about the future. Why would the market not learn their inside perspective from their dividend payout choices?

difficult to understand opinions.

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