Two Essays on the Corporate Payout Behavior of Japanese and European Firms

Date of Award

Summer 2008

Document Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration-Finance

Committee Director

Kenneth Yung

Committee Member

Mohammad Najand

Committee Member

Mohammad Najand

Committee Member

Vinod B. Agarwal


This dissertation investigates the corporate payout policies in Japanese and European firms in light of substitution and flexibility hypothesis of share repurchase. This study contributes to the literature in four folds-first, provides a comprehensive description of payout behavior in Japan and Europe for the period 1980-2006, second, examines the substitution hypothesis of share repurchase in these regions, third, provides three alternative measures of transitory earnings and fourth, examines the effect of transitory earnings on repurchase decision.

We find that from 1980 to mid 1990s majority of the Japanese and European firms were dividend payers and after mid 1990's an increasing number of firms either started to repurchase or utilized both strategies (dividend and repurchase). In Japan, largest firms pay only dividends whereas smallest firms do not pay any cash. On the contrary, in Europe the smallest firms use only repurchase while the largest firms utilize both strategies.

Building on Grullon and Michaely (2002) we investigate whether firms are substituting dividend with repurchase in Japan and Europe. Our cross sectional multivariate OLS regression results on 1050 Japanese firms for the period 1995-2006 suggest that a majority of Japanese firms use these policies as substitute. Forty percent of the Japanese firms substitute dividend with repurchase where twenty percent use these policies as complementary. On the other hand, after analyzing 451 European firms for the period 1995-2006, the results show that European firms regard repurchase and dividends as complementary policies. The cumulative abnormal return surrounding the repurchase announcements confirms the robustness of our results.

In line with flexibility hypothesis, we further investigate the role of transitory earnings in explaining repurchase decision. Considering accounting practices and data limitations we suggest three measures of transitory earnings. Our cross sectional regression results suggest that for Japanese firms repurchase is positively related to all three measures of transitory earnings. However, for European sample, repurchase is negatively related to only one measure of transitory earnings. We further show that for European firms, repurchase is influenced by the permanent earnings rather than transitory earnings. The post repurchase long term operating performance analysis provides support for the robustness of our findings.


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