Payout Policy Choices and Shareholder Investment Horizons

This paper examines how shareholder investment horizons influence payout policy choices. The authors infer institutional shareholders' investment horizons using the churn rate of their overall stock portfolios prior to the payout decision. The authors find that the frequency and amount of repurchases increases with ownership by short-term investors to the detriment of dividends. They also find that the market reacts less positively to repurchase announcements made by firms held by short-term institutions. These findings are consistent with a model in which undervalued firms signal their value through repurchases, but firms held by short-term investors make repurchases more often because those investors care mostly about the short-term price reaction. Hence, the market rationally discounts the signal provided by such repurchases. Our findings suggest that shorter shareholder investment horizons might be one contributing factor to the increasing popularity of buybacks.