| dc.description.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.
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