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Cash flow permanence and payout policy in the Norwegian market

Bøe, Eirik Aleksander; Strandås, Henning
Master thesis
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preliminary_thesis_report.pdf (3.240Mb)
URI
http://hdl.handle.net/11250/2477118
Date
2017
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  • Master of Science [1555]
Abstract
We investigate the relationship between cash flow shocks, its permanence and its

link to payout policy for publicly listed firms in Norway. We reject the “permanence

hypothesis” suggested by Guay and Harford (2000) treating dividend increases and

share repurchases as complimentary. We find evidence that substantial dividend

increases are used to distribute cash flow shocks that contain a permanent

component, whereas we find indications that special dividends are used to distribute

cash flow shocks that are somewhat transient in comparison. In extension, we find

that share repurchases are not used to distribute cash flow shocks in this market, but

firms that execute substantial repurchases experience a significant increase in

average cash flow/assets in the coming two-year period lending support to the

earnings signaling hypothesis and possibly supporting the market timing

hypothesis. When examining the market reaction to payout announcements, we find

support that substantial dividend increases are viewed as carrying a more permanent

cash flow shock also by the market. On the other hand, we find no evidence that

announcement of share repurchases are viewed as a sign of a more transient cash

flow shock by the market. Altogether we find evidence pointing to dividend

increases and special dividends being complimentary distribution methods of cash

flow shocks in this market.

2
Publisher
BI Norwegian Business School

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