Information Content of Dividends and Share Repurchases

Share repurchases have become a popular means of paying out cash to shareholders, and one of their often cited motives is their signaling of undervaluation of repurchasing firms. Dividends are often viewed as signaling future earnings. However, in theory, signaling of current undervaluation should be closely related to signaling of future cash flows. In the present study, it is found that broad dividends, which include both narrow cash dividends and share repurchase, signal both current undervaluation and future cash flows. This suggests that dividends and share repurchases are complementary in their signaling role by paying out permanent and temporary earnings, respectively.