Shareholder heterogeneity, adverse selection, and payout policy

Robert L. McDonald, Deborah J. Lucas*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

32 Scopus citations


When shareholders have different plans to sell their shares, they will, in general, have different preferences concerning the firm's decision to pay out cash using dividends or share repurchase. We illustrate these different preferences and explore a model of payout policy that highlights the adverse selection costs of repurchases when managers have superior information about the value of the firm. We show that, in the absence of fixed costs to repurchasing shares, there is a separating equilibrium in which managers use taxable dividends to signal the quality of the firm, with better firms paying lower dividends, using repurchases for the remainder of the payout. With fixed costs to repurchasing, small payouts are made via dividend and large payouts are divided between repurchases and dividends, as in the no-fixed cost case. In both cases, the percentage of shares repurchased increases with the size of the payout and larger repurchases are better news.

Original languageEnglish (US)
Pages (from-to)233-253
Number of pages21
JournalJournal of Financial and Quantitative Analysis
Issue number2
StatePublished - Jun 1 1998

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


Dive into the research topics of 'Shareholder heterogeneity, adverse selection, and payout policy'. Together they form a unique fingerprint.

Cite this