The Dividend and Share Repurchase Policies of Canadian Firms: Empirical Evidence based on New Research Design

We empirically investigate dividend and share repurchase policies of Canadian firms. We use several logit regression analyses to test the structure and determinants of the dividend and share repurchase choice. We have sent a questionnaire to the 500 largest non-financial Canadian companies listed on the Toronto Stock Exchange, of which 191 usable responses were returned. These data are used to measure firm characteristics. Our results are consistent with a structure in which the company first decides whether it wants to pay out cash to its shareholders or not. In the second stage the firm decides on the form of the payout: dividends, share repurchases or both. Payout is determined by free cash flow. The type of payout depends on behavioral and tax preferences. Furthermore, the payout is less likely to be dividends if the company has executive stock option plans. Finally, we find evidence for the Brennan and Thakor (1990) model. According to this model the existence of asymmetric information amongst outsiders is associated with a preference for dividend payments over share repurchases.