The Journal of Finance

Dividends, Share Repurchases, and the Substitution Hypothesis

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00474

Gustavo Grullon, Roni Michaely

We show that repurchases have not only became an important form of payout for U.S. corporations, but also that firms finance their share repurchases with funds that otherwise would have been used to increase dividends. We find that young firms have a higher propensity to pay cash through repurchases than they did in the past and that repurchases have become the preferred form of initiating a cash payout. Although large, established firms have generally not cut their dividends, they also show a higher propensity to pay out cash through repurchases. These findings indicate that firms have gradually substituted repurchases for dividends. Our results also suggest that before 1983, regulatory constraints inhibited firms from aggressively repurchasing shares.

Real Options, Volatility, and Stock Returns

Published: 07/19/2012   |   DOI: 10.1111/j.1540-6261.2012.01754.x

GUSTAVO GRULLON, EVGENY LYANDRES, ALEXEI ZHDANOV

We provide evidence that the positive relation between firm‐level stock returns and firm‐level return volatility is due to firms’ real options. Consistent with real option theory, we find that the positive volatility‐return relation is much stronger for firms with more real options and that the sensitivity of firm value to changes in volatility declines significantly after firms exercise their real options. We reconcile the evidence at the aggregate and firm levels by showing that the negative relation at the aggregate level may be due to aggregate market conditions that simultaneously affect both market returns and return volatility.

The Information Content of Share Repurchase Programs

Published: 03/25/2004   |   DOI: 10.1111/j.1540-6261.2004.00645.x

Gustavo Grullon, Roni Michaely

Contrary to the implications of many payout theories, we find that announcements of open‐market share repurchase programs are not followed by an increase in operating performance. However, we find that repurchasing firms experience a significant reduction in systematic risk and cost of capital relative to non‐repurchasing firms. Further, consistent with the free cash‐flow hypothesis, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in cost of capital.

Can Managers Successfully Time the Maturity Structure of Their Debt Issues?

Published: 08/03/2006   |   DOI: 10.1111/j.1540-6261.2006.00888.x

ALEXANDER W. BUTLER, GUSTAVO GRULLON, JAMES P. WESTON

This paper provides a rational explanation for the apparent ability of managers to successfully time the maturity of their debt issues. We show that a structural break in excess bond returns during the early 1980s generates a spurious correlation between the fraction of long‐term debt in total debt issues and future excess bond returns. Contrary to Baker, Taliaferro, and Wurgler (2006), we show that the presence of structural breaks can lead to nonsense regressions, whether or not there is any small sample bias. Tests using firm‐level data further confirm that managers are unable to time the debt market successfully.

Can Managers Forecast Aggregate Market Returns?

Published: 03/02/2005   |   DOI: 10.1111/j.1540-6261.2005.00752.x

ALEXANDER W. BUTLER, GUSTAVO GRULLON, JAMES P. WESTON

Previous studies have found that the proportion of equity in total new debt and equity issues is negatively correlated with future equity market returns. Researchers have interpreted this finding as evidence that corporate managers are able to predict the systematic component of their stock returns and to issue equity when the market is overvalued. In this article we show that the predictive power of the share of equity in total new issues stems from pseudo‐market timing and not from any abnormal ability of managers to time the equity markets.