The previous section has shown that how much cash the firm distributes to shareholders is highly relevant in reality. The logical next step is to investigate whether it matters how the firm distributes cash, i.e., whether it pays dividends or repurchases shares.
This section focuses on the trade-off between dividends and share buybacks. We look at the advantages and disadvantages of the two forms of corporate payouts with respect to many important dimensions, especially:
- The flexibility they grant the firm
- Their impact on earnings per share (EPS)
- The information they convey about the valuation of the firm's stock
- Their relevance in the context of executive compensation
- Their usefulness to offset ownership dilution
- As well as important tax considerations.
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