International Research Journal of Finance and Economics ISSN 1450-2887 Issue 82 (2012) EuroJournals Publishing, Inc. 2012 http://www.internationalresearchjournaloffinanceandeconomics.com

Motives of Stock Repurchases and Payout Policy

Cho-Min Lin Department of Finance, Providence University, Taiwan

Chia-Hung Teng Corresponding Author, Department of International Business

Providence University, Taiwan E-mail: chteng@pu.edu.tw

Cheng-Hui Chang Department of Finance

Hsiuping University of Science and Technology, Taiwan

Abstract

This study incorporated share repurchase motivation to investigate the relation between stock repurchases and cash dividends. This study subsequently investigated the effect of motive differences on corporate payout policy using a simultaneous censored model and a simultaneous probit model, including a choice-to-dollar amount model and a choice-to-pay model. The empirical results indicate that the contentions of this study, of the substitution relations between share repurchases and dividends of Jagannathan and Stephens (2003), are only evidenced in extremely large firms. Regarding share repurchase associated with maintaining company value, for extremely large firms, this study supports the complementary relations between share repurchases and dividends of Grullon and Michaely (2002). In particular, for an extremely large and established Taiwanese firm, the share repurchase motivation affects its corporate payout policy when the firm decides to file the stock repurchase plan (choice-to-pay model).

Keywords: Payout policy; Share repurchase motivation; Simultaneous censored (probit) model; Choice-to-dollar amount mode; Choice-to-pay model.

JEL Classification Codes: G32; G34; G35

1. Introduction Because of significant stock return fluctuation during the 1997 Asian financial crisis, in August 2000 Taiwanese firms were allowed to buy back their own stocks from the open market. Two characteristics on a stock repurchase in Taiwan differ from that in the United States. One is that the execution of a stock repurchase plan in Taiwan is stricter than that in the United States. Once a firm files a stock repurchase plan with the Financial Supervisory Commission, it has an obligation to carry out this plan within two months.1 Another characteristic distinct from the United States is that one of the requirements for filing the stock repurchase plan is to report the motivations of stock repurchase. This

1 If this plan is incomplete because the required amount of stock being purchased is slack or even not executed, then the

incomplete reason is required to be reported.

International Research Journal of Finance and Economics - Issue 82 (2012) 108 paper groups the motives into two categories: one transfers shares to their own employees and another one maintains company value.2 Few studies have focused on the effect of repurchase motives on payout policy, except for Jagannathan and Stephens (2003), who used share repurchase frequency as a proxy to represent a repurchase motive. They argued that most firms repurchase their own stocks based on the signaling or undervaluation motive from the open market only on an infrequent basis, while they believe that regular repurchase firms must have some other motives or alternative reasons to buy their stocks more frequently.3 They thus indicated that most firms with less frequent repurchases are due to undervalued stock, which is the most prevalent view of stock repurchases. The undervaluation motive fits with the signaling hypothesis, which is the most convincing rationale for firms to buy their stocks from open markets.4 The signal might point towards two implications. One is used to signal firms future potential substantial earnings and another is to convey the undervaluation information suggested by Comment and Jarrell (1991) (Jagannathan and Stephens, 2003).

In addition to share repurchases, firms that pay cash dividends are also expected to signal favorable information or to mitigate agency conflicts by reducing free cash to managers (Miller and Rock, 1985; Easterbrook, 1984). Contrasted to U.S firms paying more cash dividends over stock dividends, in the early days, most Taiwanese firms paid stock dividends instead of cash, or paid more stock dividends and less cash dividends. However, the structure of paying dividends has changed since 1998 because of new tax laws levying 10% taxes for retained earnings. Beginning in 2000, Taiwanese firms started to suffer under a sluggish economy and investors did not appreciate firms paying large stock dividends. As a result, Taiwanese firms have gradually switched their dividend payments toward cash dividends (Huang, You, and Lin, 2009). Huang et al. (2009) showed that the number of Taiwanese firms paying higher cash dividends have increased since 2000. Unlike U.S. firms paying cash dividends more than once for a given year, Taiwanese firms pay the cash dividend once a year. This study focuses on cash dividends instead of stock dividends. Several previous studies have evidenced that repurchases and cash dividend payments might have a substitution relation, based on signaling and agency problems. The following section discusses this perspective.

The number of dividend-paying firms has dramatically declined over the last two decades. Fama and French (2001) have shown that the proportion of U.S. non-financial and non-utility firms paying cash dividends fell from 66.5% in 1978 to 20.8% in 1999. However, DeAngelo, DeAngelo, and Skinner (2004) observed a steady upward trend of aggregate dividends over the period 1950-2000. DeAngelo et al. (2004) consequently argued that dividends are not going to disappear even though the increasing number of dividend-decreasing firms observed by Fama and French is remarkable. DeAngelo et al. further investigated sample firms (industrials) over the period 1978-2000 and found that most dividend-decreasing firms are paying small dividends.5 Julio and Ikenberry (2004) indicated the propensity of U.S. industrial firms towards paying cash dividends since 2000, which has increased from 15% in the first quarter of 2000 to 20% in the first quarter of 2004. Even though the number of dividend-paying firms is lessening, as evidenced in Fama and French (2001), a dividend decrease has not occurred in the larger payers (i.e. top-end firms), because most of them pay more cash dividends instead. They consequently concluded that dividend paying clusters in large firms. Larger cash dividends paid by top-end firms surpass dividend reduction incurred by small firms. DeAngelo et al. thus concluded that dividends are not going to disappear, but are merely being transferred to large firms.

2 A third motive, in addition to the two motives mentioned above, includes buy back for convertible bonds, which is less

frequently announced in Taiwan. We consequently ignore this category. 3 Jagannathan and Stephens (2003) explained why they use the share repurchase frequency as a proxy for repurchase

motives. They indicated that it is unlikely that a firm could credibly signal that its stock is undervalued on a regular basis.

4 In addition to undervaluation, there are other potential reasons, including tax benefit, funding option programs, and

distributing temporary cash flows to shareholders, as mentioned by prior studies (see Jagannathan and Stephens, 2003). 5 DeAngelo et al.(2004) refer to non-financial and non-utility firms as industrials.

109 International Research Journal of Finance and Economics - Issue 82 (2012) With respect to share repurchases, Grullon and Michaely (2002) indicated that managers in

U.S. firms have substantially changed their corporate payout policy since the mid-1980s. They further provided evidence of the increased dollar amount of repurchases, which appeared as a growth buyback program from 26.6 % in 1972 to 84.2 % in 2000. Jagannathan, Stephens, and Weisbach (2000) point to the fact that the number and the announced value of open market repurchase programs by U.S. industrial firms have grown 650% and 750% over the period 1985 to 1996, respectively. They concluded that share repurchases have become an important means in corporate payout policy. Consistent with Jagannathan et al.(2000) and Grullon and Michaely (2002), an interview with 384 CFOs reported in the survey of Brav, Graham, Harvey, and Michaely (2005) indicates that managers favor repurchases since they are used by firms with more flexible cash flows (that is, higher temporary cash flows as indicated in Jagannathan et al. (2000)). Ikenberry, Lakonishok, and Vermaelen (1995) suggested that the growing trend of open-market repurchases is due to the provision of SEC (Securities and Exchange Commission) Rule 10b-18.6

Regarding whether or not the substitution relation between share repurchases and cash dividends holds, the related research result is mixed. John and Williams (1985), Bernheim (1991), and Allen et al. (2000) indicated that dividends, rather than repurchases as an indicator, represent firm quality and thus concluded that repurchases and dividends are not interchangeable. By contrast, Modigliani (1961), Bhattacharya (1979), Easterbrook (1984), Miller and Rock (1985), Jensen (1986), and Grullon and Michaely (2002) claimed that dividends and repurchases are interchangeable (i.e., substitution), because either dividends or repurchases are capable of reducing agency conflicts and undervaluation, as evidenced by the substitution hypothesis, specifically for large, established firms. Grullon and Michaely (2002) explored why firms did not pay cash through repurchases prior to the mid-1980s.They found regulatory constraints to be a major factor preventing firms from buying treasure stocks in the markets. Specifically, they also noted that young firms prefer repurchases more than before, and repurchases are the first choice for firms to distribute excess cash to shareholders the first time. Grullon and Michaely (2002), pointed out the importance of understanding the motivation of share repurchases in corporate payout policy. They mention in their paper:

Furthermore, understanding the motivation behind the recent surge in share repurchase activity will allow us to better understand whether corporations view dividends and repurchases as interchangeable payout methods...7 Accordingly, this work incorporates the motives of share repurchases in investigating the relation between cash dividends and share repurchases, for an in-depth study of this relationship.

Even though the number of dividend-paying firms has dramatically declined in the U.S., on the contrary, we observe a rapid 43% growth rate in the number of dividend-paying firms in Taiwan during 2000-2007. Taiwanese firms used to pay stock dividends rather than cash dividends prior to 1998, but the dividend policy has changed since 2000. Huang, You, and Lin (2009) showed that the number of Taiwanese firms paying higher cash dividends exceeds the number of firms paying stock dividends since 2000. As mentioned in the first section of this study, Taiwanese firms have been allowed to repurchase their own stocks from the open market since 2000. Even though the growing trend in open-market repurchases is not significant, their number was 66 in 2002, they hit a peak of 130 in 2004, and then declined to 63 in 2007. The payout policy of Taiwanese firms has dramatically changed from the outset of share repurchases in 2000. Dividend-increasing firms have prevailed, while the number of repurchase firms has not grown steadily over time.

This study also observed the gradual increase of foreign investor ownership in Taiwan, which might lead to firms distributing their cash to shareholders through cash dividends since foreign investors prefer to invest in firms paying cash dividends. On the premise of an increased presence of

6 Rule 10b-18, adopted in 1982, provides a voluntary "safe harbor" from liability for manipulation under Sections 9(a)(2)

and 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Rule 10b-5 under the Exchange Act, when an issuer or its affiliated purchaser bids for or purchases, shares the issuer's common stock in accordance with Rule 10b-18's manner, timing, price, and volume conditions, quoted from http://www.sec.gov/divisions/marketreg/r10b18faq0504.htm.

7 Appears in Grullon and Michaely (2002), page 1650.

International Research Journal of Finance and Economics - Issue 82 (2012) 110 foreign investors in Taiwan, along with foreign investor preferences for dividends, the current study investigated whether there have been corporate payout policy changes. In other words, are cash dividends a substitute for share repurchases? The answer to this question is important, because it enhances our understanding of corporate policy in Taiwan. To answer this question, this work conducted an in-depth examination that incorporates the motives of share repurchases with payout policy, to investigate whether the motives of share repurchases change the relation between the share repurchase and cash dividend. This setting is almost absent from previous studies except for Jagannathan and Stephens (2003).

As mentioned earlier in our paper, Jagannathan and Stephens (2003) used share repurchase frequency as a proxy to represent the repurchase motive, and observed a positive relation between repurchase frequencies and dividend payment (as indicated in their paper, firms that repurchase most frequently have characteristics similar to firms that routinely increase their dividend paymentsIt appears that these firms may be substituting repurchases for dividend increases). Therefore, investigating whether the substitution relation between cash dividend and share repurchases is changeable, because of the difference in motives of share repurchases, is interesting. A distinct payout policy likely results from a difference in motives for share repurchases. In other words, the relation between cash dividend and stock repurchases may differ between repurchases based on a transfer of motives to employees and repurchases to signal undervalued company stock for Taiwanese firms. Because of the mixed results from previous studies that lack incorporating the motives for share repurchases, this work attempts to discover the mystery from the perspective of share repurchase motives.

This study mainly extends the outstanding work by Jagannathan and Stephens (2000) and examines payout policy using a simultaneous censored model and a simultaneous probit model, respectively.8 Because either cash dividends or share repurchases belong to the corporate payout policy, corporations should take the payout decision as a whole for a given year. Most prior studies demonstrate a positive or negative relationship between cash dividends and share repurchases. The specification used in this study allows examination of the relationship between cash dividends and share repurchases within a simultaneous framework.9 We take both cash dividends and share repurchases as endogenous variables, contrasted to most related studies that only take either one as an endogenous variable.

Previous studies investigating the substitution hypothesis between stock repurchases and dividend payment adopt either a univariate analysis or a univariate logit model. Grullon and Michaely (2002) used dividend forecast errors, defined as the difference between actual and expected dividend payments, and assumed a negative association between dividend forecast error and stock repurchases if firms tend to substitute repurchases for dividends. In this case, they argued that the substitution hypothesis between repurchases and dividends is supported. Contrary to previous studies, this study tested the substitution hypothesis using a more rigid econometric framework, which considered both the share repurchases and dividend payments as endogenous variables and further divided share repurchases into two categories based on repurchase motive. The strict model used in this study is called a simultaneous censored (probit) model. The advantage of using this framework is that it allows considering the corporate payout policy as a whole, which is closer to the payout decision process made by firms. The simultaneous censored (probit) model is further demonstrated in detail later.

The current study specifically investigated the relationship between cash dividends and share repurchases from two dimensions: for some significant fraction, the amount spent on cash dividends or share repurchases is zero; thus, one is a simultaneous censored model, in which the dollar amount to pay (choice-to-dollar amount) is studied. Another model is the propensity to pay (choice-to-pay), in

8 A similar approach is indicated in Lee (1995), who used semi-parametric estimation to estimate simultaneous equations.

However, in our paper we take the maximum likelihood estimation rather than semi-parametric estimation to estimate simultaneous equations.

9 By doing this, we formally use the Durbin-Wu-Hausman test to investigate the possibility of misspecification. As a result,

the test strongly rejects the possibility of exogeneity from share repurchase and cash dividend.

111 International Research Journal of Finance and Economics - Issue 82 (2012) which we study the payout decision using a simultaneous probit model.10 Taken together, our major contribution to the literature is to incorporate the motives of share repurchases into investigating the relationship between cash dividends and share repurchases within a simultaneous framework.

Our empirical results indicate that the complementary relationship is almost significant for the choice-to-pay model regardless of the share repurchase motive, while the substitution relationship is significant in the choice-to-dollar amount model for share repurchases to transfer shares to employees (this belongs to repurchases most frequently used in Jagannathan and Stephens (2003)). However, share repurchases to maintain company value (the infrequent repurchase case in Jagannathan and Stephens (2003)) are not significant. Therefore, considering the difference in share repurchase motivation affects the corporate payout policy in the case of choice-to dollar amount, but has no effect on the choice-topay case. Therefore, the empirical results only partially support the proposed hypothesis and the findings of Jagannathan and Stephens (2003). In particular, the results regarding the payout policy for extremely large and established Taiwanese firms would not file the share repurchase program associated with transferring shares to employees (cutting the amount of share repurchases to transfer shares to employees) as they tend to issue cash dividends (inclined to pay more cash dividends). Hence, concerning share repurchases to transfer shares to employees, the findings of this study are contrary to complementary relations between share repurchases and dividends of Grullon and Michaely (2002), though this study supports their findings regarding share repurchases associated with maintaining company value. Finally, the empirical results indicate that for an extremely large and established Taiwanese firm, share repurchase motivation affects its corporate payout policy when the firm decides to file the stock repurchase plan (choice-to-pay model). To date, to the best of our knowledge, this finding has not been reported elsewhere in related literature.

This paper is organized as follows. The next section demonstrates the hypotheses and proxy variables. Section 3 describes sample data and methodology. Section 4 presents the results of a simultaneous censored model and a simultaneous probit model. Section 5 concludes.

2. Hypotheses Development and Proxy Variables Compared with share repurchase frequency as a proxy to represent a buying back motive in Jagannathan and Stephens (2003), this work offers more direct and transparent information on the motives opened to the public in Taiwan (as mentioned in the first section of this paper). This study incorporates repurchase motivation with an investigation on the relation between share repurchases and cash dividends. Consistent with Guay and Harford (2000), Jagannathan, Stephens, and Weisbach (2000), and Grullon and Michaely (2002), Jagannathan and Stephens (2003) indicated that firms associated with more frequent repurchases have similar firm characteristics with dividend increases. They concluded that firms tend to substitute stock repurchases for dividend increases. As such, they indicated that most firms with less frequent repurchases are attributed to undervalued stock. Jagannathan and Stephens (2003) indicated that firms with frequent repurchases, not based on undervaluation, possess similar characteristics to dividend-increasing firms - that is, the funds used in share repurchase would otherwise be used in dividend payments. This implies that firms might substitute share repurchases for dividends. Nevertheless, the effects of share repurchase motivations on the substitution between share repurchases and cash dividends are nearly absent from previous studies except for Jagannathan and Stephens (2003). This paper incorporates share repurchase motivations into the effect of corporate payout policy, and investigates the effect of corporate payout policy from two aspects: choice-to-pay and choice-to-dollar amount. We not only studied the propensity to pay cash (choice-to-pay), but also the amount to distribute cash (choice-to-dollar amount).

Guay and Harford (2000) and Jagannathan and Stephens (2003) indicated the similar characteristics of firms that repurchase most frequently to those firms paying more cash dividends. This study thus conjectured that there are substitutions between share repurchases and cash dividends

10 The choice-to-pay model appeared in Baba (2009).

International Research Journal of Finance and Economics - Issue 82 (2012) 112 under share repurchase motivations due to transferring shares to employees, while there are complementarities between share repurchases and cash dividends under share repurchase motivations due to undervaluation (maintain company value). This study hypothesized the substitution hypothesis between cash dividends and share repurchases to transfer shares to employees, and hypothesized the complementary hypothesis between cash dividends and share repurchases to maintain company value, which is our main hypothesis for this study.

The dependent variables in this study are dividend (DIVID), defined as the total dollar amount of dividends declared on the common stock of the firms during the year, and stock repurchase (REPUR), defined as total expenditure on the purchase of common and preferred stocks.11 The other variables affecting share repurchases and cash dividends are depicted as follows.

Grullon and Michaely (2002) found that firms are inclined to pay out cash through share repurchases - that is, firms prefer repurchases to dividends. Specifically, they further contended that larger, established firms prefer to distribute cash to shareholders by way of repurchases, but they typically do not cut dividends. A big firm does not increase repurchasing at the cost of dividend reduction. Therefore, it seems logical that cash dividends and repurchases are not substitutes for each other when the largest firms buy back their own stock from the open market. To test this hypothesis, we grouped our sample firms by firm size (SIZE) based on the 50 percentile (median) and 75 percentile of firm size.12 We used the above sub-samples to run the regression model.

Early in the 21st century, Jagannathan et al (2000), and Grullon and Michaely (2002) addressed that most firms prefer repurchases to dividends. From the dividend demand perspective, a tax cut might attract investors, particularly individual investors, and lead to dividend increases. Taxation might be a factor related to the dividend payout policy, because dividends have a tax disadvantage contrasted to the advantage of capital gains in stock repurchases. However, by interviewing managers, Brav et al. (2005) showed that taxation is not the primary factor affecting the dividend payout ratio. Dividends are at a disadvantage through taxation, particularly for individual investors who have a higher personal tax rate. Most previous studies, such as Allen et al., 2000, Redding, 1997, and Shleifer and Vishny, 1986, have shown that firms paying high dividends tend to attract institutions due to the lower tax rates faced by institutions. Therefore, institutional investors have a tax advantage relative to that of individual investors who face higher tax rates. In contrast to previous studies, Jain (2007) showed opposite results in that institutional investors prefer firms paying low dividends to firms paying high dividends.

Because institutions hold larger amounts of shares in a corporation, they should more incentive to monitor (see, e.g., Shleifer and Vishny, 1986). We assumed institutions have a strong capacity for gathering information and monitors. Institutional investors are better informed, and thus institutional investors prefer cash dividends to prevent firms from investing in under-evaluated investment projects (i.e., negative NPV projects).13 Jain (2007) showed that institutional investors prefer firms that buy more treasury stocks, consistent with the results from Brennan and Thakor (1990), who indicated that individuals do not prefer to share repurchase firms. Jagannathan et al (2000) indicated that firms with higher institutional ownership prefer to increase payouts. However, firms only increasing repurchases (not for cash dividends) have lower institutional ownership.

Baba (2009) presented evidence that foreign investors cause Japanese firms to increase dividends. On the contrary, the study by Grinstein and Michaely (2005) provided no significant evidence that institutions cause U.S. firms to increase dividends. Institutional investors are known for better monitoring and information gathering. In Taiwan, institutions, especially foreign investors, often play a leading role in financial market investment. Therefore, we include foreign investors (FI) as one of the controlled variables and the percentage of outstanding shares held by domestic institutional

11 We used the data of execution of stock repurchases rather than the data of declaration of stock repurchases.

12 Although high dividend payers pay more even though dividend-paying firms are fewer, DeAngelo et al. (2004) found that dividends do not disappear, but are transferred to large firms.

13 Easterbrook (1984) and Jensen (1986) asserted that larger cash dividend payouts reduce agency cost, which could be referred to as self-imposed discipline. However, according to interviewing managers in the Brav et al study, the discipline imposed by dividends is not a major factor affecting dividend policy.

113 International Research Journal of Finance and Economics - Issue 82 (2012) investors (DOMESTIC) as another controlled variable. This work also takes the percentage of outstanding shares held by big shareholders (BIG) as a proxy for the tax aspect because large shareholders typically have higher personal tax rate.

Jensen (1986) suggested that agency conflicts become more serious from overinvestment when firms have more free cash flow (FCF). Therefore, payouts to shareholders might mitigate agency conflicts in firms (Grullon and Michaely, 2002). From the perspective of capital structure, Jensen (1986) indicated that firms with a higher debt ratio have a lower agency problem due to monitoring from a creditor. Brav et al (2005), in their interviews with managers, showed that paying down debt is the first choice regardless of dividend or repurchase reductions, as mentioned in the previous section. Some managers are reluctant to increase repurchases and/or dividends at the cost of debt rating. We therefore assumed that debt ratios (DR) could be a factor affecting payout policy. In addition to the factors discussed above, other factors affecting the dividend payout ratio or repurchase decisions are discussed as follows.

Grullon et al (2002) and Julio and Ikenberry (2004) asserted that increasing dividends can convey (signal) positive information and/or negative information to investors. On the positive side, they signal that their companies are less risky and more mature, while on the negative side, they might imply the firms do not have better investment opportunities and so distribute excess cash to shareholders (Brav et al. 2005).14 Investment opportunities have a different impact on dividend and stock repurchase decisions, which are addressed in Brav et al, based on their interviews with executives. Stock repurchases interact more with investment opportunities than that of dividends.15 We used the ratio of market value of the firms assets to its book value (MB) as a proxy for growth opportunity (a better investment opportunity exists in a firm with higher growth opportunity). Table 1 provides definitions of the variables used in this study.

Table 1: Description of variables

Payout variables Definitions Dividends (DIVID) Total dollar amount of dividends of firms during the year Stock repurchase (REPUR) Total expenditure on the purchase of common and preferred stocks REPUR_TS Stock repurchase due to transfer shares to employees REPUR_MV Stock repurchase due to maintaining company value Explanatory variables Return on assets (ROA) EBIT/total assets, where EBIT is earnings before interest and income taxes Firm size (LSIZE) Log (total assets) Institutional ownership (INSTIT) Percentage of outstanding shares held by institutional investors BIG 10 % or more of outstanding shares held by big shareholders Free cash flow (FCF) Operation cash flow Debt ratios (DR) Total debt/total assets Market to book ratio (MB) Ratio of the market value of the firms assets to its book value Foreign investors ownership (FI) Ratio of the shares of foreign investors to the outstanding stocks Domestic institutional ownership (DOMESTIC) Ratio of the shares of domestic institutional investors to outstanding stocks

3. Sample Selection and Methodology This study collected all variables from the Taiwan Economic Journal (TEJ). The announcement information of stock repurchase firms listed on the Taiwan Stock Exchange (TSE) was collected from the Market Observation Post System (MOPS) in the Taiwan Stock Exchange and Gre Tai Securities Markets (over-the-counter) over the period 2000 to 2007.

14 However, Allen and Michaely (2003), DeAngelo et al. (2004), and Brav et al. (2005) suggested that the signaling model is not supported.

15 In general, corporations make dividend choices and investment decisions simultaneously and repurchase choices are made later (Brav et al., 2005).

International Research Journal of Finance and Economics - Issue 82 (2012) 114 Under the assumption of the signaling model or the agency cost model, the corporate payout

policy was mainly composed of cash dividends and stock repurchases. We used the release of motives for repurchases and incorporated it into our specification. Given the influence of factors omitted from stock repurchases on stock repurchases, the effect of such factors might contain potential firm characteristics and a general state of the economy. The effect of omitted factors on stock repurchases is likely similar to their effect on cash dividend. If this is true, the error terms in these two equations might capture similar effects and simultaneously correlate. Given the contemporaneous correlation in error terms, as well as both cash dividends and share repurchases being endogenous, a natural approach to this problem is a simultaneous censored (probit) model.

The simultaneous model is specified as follows: * *

1 12 2 11 1 12 1 13 1 14 1 15 1 16 1 17 1 _ (1)t t t t t t t ty y LSIZE DR FCF ROA BIG MB Elec Dummy = + + + + + + + + (1) * *

2 21 1 21 1 22 1 23 1 24 1 25 1 26 1 27 1

28 29 1 1

_

t t t t t t t t t

t

y y LSIZE DR FCF ROA BIG MB FIDIVID lag Domestic

= + + + + + + +

+ + + (2)

1

2

~ (0, )N

Here, 1ty

is cash dividends (DIVID) and 2ty denotes stock repurchases due to transferring shares to employees (REPUR_TS) or stock repurchases due to maintaining company value (REPUR_MV). Other variables are defined in Table 1, and is a joint distribution and distributed as normal with zero mean and variance-covariance in terms of.

If only max ( *jy , 0) are observed, then this model is a simultaneous censored model. First, assume that the reduced-form equation for the above simultaneous equation is the Tobit model, in which the maximum likelihood estimation is used to estimate the parameters of the reduced-form equation. Subsequently, given the relationship between the parameters of structure equations and reduced-form equations, we used MDE (minimum distance estimation methods, MDE, see Chamberlain, 1982; Hsiao, 1986; Kodde et al., 1990; Lee, 1995) to estimate the parameters of structure equations. Alternatively, if only 1[ *jy > 0]) are observed, and 1[A] = 1 if A holds and 0 otherwise, then this model is a simultaneous Probit model. Second, assume that the reduced-form equation for the above simultaneous equation is the Probit model, in which the maximum likelihood estimation is used to estimate the parameters of reduced-form equation. Subsequently, given the relationship between the parameters of structure equations and reduced-form equations, we used MDE (minimum distance estimation methods, MDE, see Chamberlain, 1982; Hsiao, 1986; Kodde et al., 1990; Lee, 1995) to estimate the parameters of structure equations.

We initially estimated the above censored simultaneous equation and probit simultaneous equation for cash dividends (DIVID, 1ty ) and stock repurchases due to transferring shares to employees (REPUR_TS, 2ty ), respectively. In turn, we estimated the censored simultaneous equation and probit simultaneous equation for cash dividends (DIVID, 1ty ) and stock repurchases due to maintaining company value (REPUR_MV, 2ty ). Tables 5 and 6 report the empirical results from the above specifications.

To provide a rationale to include in the repurchase motivations, in empirical econometrics models we first explored the relation between stock repurchases and cash dividends without considering the motivations. Subsequently, the relation between stock repurchases and cash dividends when considering the motivations was examined within the econometrics framework used. We first tested the relation between stock repurchases and cash dividends without considering the difference in repurchase motives (results appear in Model 1 and Model 4 of Table 5 for the case of choice-to-pay; results appear in Model 1 and Model 4 of Table 6 for the case of choice-to-dollar amount). We then tested the relation between stock repurchases and cash dividends considering the difference in

115 International Research Journal of Finance and Economics - Issue 82 (2012) repurchase motives. Because of the mixed empirical results from previous studies, the advantages of considering repurchase motives allowed us to re-examine whether the firms cash payouts to shareholders through buying more treasury stocks from the market in lieu of paying cash dividends depended on different repurchase motives. Will the substitution hypothesis between repurchases and dividends still hold when considering the difference in repurchase motives?

Most previous studies regarding the relation between stock repurchases and cash dividends do not simultaneously consider both variables as endogenous. In contrast to previous papers, this study adds to the literature by simultaneously considering dividend payouts and repurchase payouts, and treating them as endogenous variables. To verify the above views, we ran the simultaneous censored model and the simultaneous probit model, respectively.

4. Empirical Results16 Univariate Analysis Table 2 presents the mean of cash dividends and repurchases. The uptrend prevails for cash dividends regardless of cash dividend measurements, which are 0.195 in 2002 on average, increasing to 0.4 in 2007 in panel A, while the mean is 0.016 in 2002 on average and increases to 0.4 in 2007 in panel B. The table shows no obvious trend for share repurchases, regardless of the payout measurement during 2002-2007.

Table 2: Summary statistics: Key variables

Panel A: ratio of payout amount to earnings DIVID_ebit REPUR_TS REPUR_MV

2002 0.195 14.577 70.425 2003 0.247 21.397 33.599 2004 0.262 33.506 30.602 2005 0.322 21.665 32.892 2006 0.376 11.952 21.878 2007 0.400 21.155 13.369

2002-2007 0.301 20.712 33.718 Panel B: ratio of the payout amount to total assets

DIVID_asset REPUR_TS REPUR_MV 2002 0.016 1.185 1.595 2003 0.023 1.716 1.744 2004 0.031 3.549 2.954 2005 0.035 1.544 1.285 2006 0.043 1.613 2.096 2007 0.400 1.697 2.387

2002-2007 0.033 1.884 2.010 The key variable is cash dividends divided by earnings (DIDV_ebit) or divided by total assets (DIDV_asset), while another key variable is share repurchases to transfer shares to employees (REPUR_TS) and another one is share repurchases to maintain company value (REPUR_MV). FI is foreign investor ownership. DOMESTIC is domestic institutional investor ownership. ELEC DUMMY is an indicator variable that is equal to one if a firm belongs to an electronics industry, and zero otherwise.

Table 3 reports that whether there is a difference between electronics firms and non-electronics firms on cash dividends and share repurchases. Most p-values in Table 3 are significant, except for share repurchases for maintaining company value (REPUR_MV) in panel A. This suggests that electronics firms pay cash to shareholders through dividends and repurchases more than non-electronics firms do. Not surprising, Table 4 indicates that foreign investor ownership is positively significantly associated with cash dividends. However, foreign investor ownership is only positively

16 The descriptive statistics for the sample firms are in Appendix 1.

International Research Journal of Finance and Economics - Issue 82 (2012) 116 significantly associated with share repurchases to transfer shares to employees (REPUR_TS), regardless of panel A or panel B, but insignificant in the case of share repurchases for maintaining company value (REPUR_MV) regardless of panel A or panel B.

Table 3: The industry effect on the payout policy

Panel A: ratio of payout amount to earnings ELEC DUMMY DIVID_ebit REPUR_TS REPUR_MV

0 0.288 7.045 27.582 1 0.321 44.353 44.332

P-value: 0.012 (0.069) 0.000 (0.000) 0.218 (0.331) Panel B: ratio of the payout amount to total assets

ELEC DUMMY DIVID_asset REPUR_TS REPUR_MV 0 0.029 0.432 0.894 1 0.040 4.445 3.980

P-value: 0.000 (0.001) 0.000 (0.000) 0.021 (0.002)

The key variable is cash dividends divided by earnings (DIDV_ebit) or divided by total assets (DIDV_asset), while another key variable is share repurchases to transfer shares to employees (REPUR_TS) and another one is share repurchases to maintain company value (REPUR_MV). ELEC DUMMY is an indicator variable that is equal to one if a firm belongs to electronics industry, and zero otherwise. The first numbers of p-value are obtained from the two-sample t-test and the numbers in parentheses are the two-sample Wilcoxon rank-sum (Mann-Whitney) test.

Table 4: The foreign investor effect on the payout policy

Panel A: ratio of the payout amount to earnings Foreign investors DIVID_ebit REPUR_TS REPUR_MV

0 0.120 13.63 15.552 1 0.478 27.66 51.568

P-value: 0.000 (0.000) 0.074 (0.032) 0.528 (0.037) Panel B: ratio of the payout amount to total assets

Foreign investors DIVID_asset REPUR_TS REPUR_MV 0 0.009 0.997 0.730 1 0.057 2.776 3.298

P-value: 0.000 (0.000) 0.003 (0.000) 0.599 (0.000) The key variable is cash dividends divided by earnings (DIDV_ebit) or divided by total assets (DIDV_asset), while another key variable is share repurchases to transfer shares to employees (REPUR_TS) and another one is share repurchases to maintain company value (REPUR_MV). The number 1 in FI represents larger foreign investor ownership and 0 in FI represents smaller ownership, which is based on the median of the foreign investor ownership. The first numbers of p-value are obtained from the two-sample t test with unequal variance and the numbers in parentheses are the two-sample Wilcoxon rank-sum (Mann-Whitney) test.

The relationship between cash dividends and share repurchases is estimated using a simultaneous censored (tobit) specification. Table 5 displays the regression results. Regarding the choice-to-dollar amount estimation, Model 1 shows estimates without considering the difference in repurchase motives, while Model 2 (share repurchases associated with transfering shares to employees) and Model 3 (share repurchases associated with maintaining company value) report estimates considering the difference in repurchase motives. The estimation results for the choice-to-dollar amount are presented from Models 1-3, in which the relationship between cash dividends and share repurchases is substitution. Specifically, the estimation coefficients of both DIVID and REPUR are negative and significant only in the share repurchases to transfer shares to employees (Model 2 in Table 5). Hence, this finding is consistent with the suggestion of Jagannathan and Stephens (2003) for firms that repurchase most frequently. This suggests that dividend-increasing firms should cut the amount of share repurchases to transfer shares to employees because firms tend to pay more cash dividends. Turning to another part of Table 5, the estimation results for the choice-to-pay (using a simultaneous probit specification) are presented from Models 4-6, in which, by contrast, the

117 International Research Journal of Finance and Economics - Issue 82 (2012) relationship between cash dividends and share repurchases becomes a complementary relation. Model 4 shows estimates without considering the difference in repurchase motives, while Models 5 (share repurchases associated with transfering shares to employees) and 6 (share repurchases associated with maintaining company value) report estimates considering the difference in repurchase motive. Models 4-6 report choice-to-pay estimation results, in which all of the estimated coefficients (DIVID and REPUR) are positive and significant.17 This implies that cash dividends and share repurchases are complementary no matter what the motivation is for share repurchases. Hence, share repurchase motives are unrelated to corporate payout policy because the estimates of Model 4 are qualitatively similar to those of models 5 and 6. The consequence of estimation might result from the increased presence of foreign investors in Taiwan over time. Because of the preference for cash dividends, foreign investors might encourage firms to pay cash dividends even for repurchase firms.18 In sum, our empirical results indicate that the empirical result of Jagannathan and Stephens (2003) is consistent with the case of choice-to-dollar amount only. Finally, regarding choice-to-dollar amount, the results in Table 5 mostly indicate that share repurchase motivation is seemingly imperceptibly related to corporate payout policy.

17 The analysis of the main text focuses on the payout variables deflated by earnings, and most results for payout variables deflated by assets are similar and hence omitted from the table due to space limitations..

18 In the early period, Taiwanese firms preferred stock dividends to cash dividends.

International Research Journal of Finance and Economics - Issue 82 (2012) 118

Table 5: Regression estimations for full samples

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Variables REPUR (EBIT) DIVID (EBIT)

REPUR_TS (EBIT)

DIVID (EBIT)

REPUR_MV (EBIT)

DIVID (EBIT)

REPUR (Dummy)

DIVID (Dummy)

REPUR_TS (Dummy)

DIVID (Dummy)

REPUR_MV (Dummy)

DIVID (Dummy)

DIVID -1.8760 (-1.4643) -0.2590** (-3.0582)

-3.6991 (-1.5085)

1.6204** (18.8271)

1.6147** (16.6602)

1.7463** (16.6085)

REPUR -3.3360** (-9.7148) -3.3309** (-9.8153)

-3.5085** (-6.2034)

1.5371** (15.7928)

1.4498** (12.8170)

1.7052** (12.7654)

LSIZE 0.2037 (1.0690) 0.5105** (10.0551)

0.2615** (2.0458)

0.5066** (10.4764)

0.4070 (1.1267)

0.5325** (6.9209)

-0.0798* (-1.3196)

0.1151* (1.8893)

-0.1281* (-1.8836)

0.1369** (2.3521)

-0.0312 (-0.3946)

0.0862 (1.4357)

DR -1.9914** (-3.8591) -0.8266** (-3.6410)

-0.8544** (-2.8420)

-0.7960** (-4.0214)

-3.1776** (-3.6694)

-0.9304** (-2.4432)

-0.1167 (-0.5096)

-0.6877** (-3.0129)

0.1152 (0.4174)

-0.9621** (-4.4017)

-0.0613 (-0.2116)

-0.9578** (-4.3581)

FCF 1.9138 (0.5780) 3.2430** (2.9275)

1.7501 (1.2887)

3.2037** (2.9626)

2.3088 (0.3735)

3.3903** (2.6850)

2.2438* (1.6595)

0.2221 (0.1788)

1.7155 (1.1493)

0.9663 (0.4539)

2.7181 (1.4791)

0.5915 (0.4732)

ROA -3.0602 (-1.0107) -0.9733

(-0.9690) -0.7923

(-0.6056) -0.8964

(-0.9530) -4.7322

(-0.8768) -1.1784

(-0.9331) -6.0305** (-4.4642)

7.3310** (5.7205)

-5.4175** (-3.6257)

7.6733** (5.7982)

-7.1548** (-3.8669)

8.5718** (6.6140)

BIG -1.3683** (-3.2662) 0.0708

(0.5066) -0.5341** (-2.3520)

0.0861 (0.6279)

-2.4666** (-3.2820)

-0.0078 (-0.0345)

-0.8351** (-3.8431)

0.9016** (5.0204)

-0.7162** (-2.7736)

0.7835** (4.5034)

-0.7047** (-2.3995)

0.7198** (4.1427)

MB -0.3335** (-2.9703) 0.0038

(0.1039) -0.1119** (-2.3155)

0.0068 (0.1875)

-0.7910** (-3.9140)

-0.0176 (-0.3124)

-0.1948** (-4.0922)

0.0777* (1.7770)

-0.1499** (-2.9833)

0.0343 (0.7803)

-0.3330** (-4.8164)

0.1378** (3.4798)

FI 0.0040 (1.5907) 0.0042

(1.6380) 0.0034

(1.2520) 0.0050

(1.3395) 0.0083** (2.4116)

0.0060* (1.6714)

DIVID_lag 0.0006** (16.7655) 0.0006** (14.9456)

0.0006** (12.9323)

0.0005** (2.2077)

0.0004** (1.9992)

0.0007** (2.9311)

DOMESTIC -0.0018 (-0.1364) -0.0018

(-0.1392) -0.0027

(-0.2086) 0.0114

(0.9269) 0.0124

(1.0062) 0.0226* (1.7223)

ELEC DUMMY

1.1394** (8.0824)

0.7581** (11.4128)

0.6716** (2.6871)

0.3201** (4.5131)

0.4266** (5.3820)

0.0703 (0.7106)

The dependent variable is cash dividends divided by earnings (DIVID_EBIT), while another dependent variable is the ratio of share repurchases to earnings (REPS_EBIT), and DIVID represents cash dividends. REPUR_TS is defined as share repurchases associated with transfering shares to employees while REPUR_MV is defined as share repurchases associated with maintaining company value. REPUR (Dummy) and DIVID (Dummy) indicate a dummy variable. LSIZE is the natural logarithm of total assets. DR is the debt ratios. FCF is the free cash flow. ROA is the return on assets. BIG is the percentage of outstanding shares held by big shareholders. MB is the ratio of the market value of the firms assets to its book value. FI is foreign investor ownership. DIVID_lag defined as cash dividend lagged one year. DOMESTIC is domestic institutional investor ownership. ELEC DUMMY is an indicator variable that is equal to one if a firm belongs to an electronics industry, and zero otherwise. Numbers in parentheses are t-statistics. Statistical significance at the 10%, 5%, and 1% levels is indicated by *, **, and ***, respectively.

119 International Research Journal of Finance and Economics - Issue 82 (2012) As mentioned earlier, Grullon and Michaely (2002) contended that larger, established firms

prefer to distribute cash to shareholders through repurchases, but they typically do not cut the dividends. A larger repurchase-increasing firm does not do so at the expense of dividend reduction. Table 6 presents the results when the total sample is divided according to firm size. Regarding the choice-to-dollar amount estimation, Model 1 shows estimates without considering the difference in repurchase motives, while Model 2 (share repurchases associated with transfering shares to employees) and Model 3 (share repurchases associated with maintaining company value) report estimates considering the difference in repurchase motives. As for the choice-to-pay estimation, the Model 4 shows estimates without considering the difference in repurchase motives, while Model 5 (share repurchases associated with transfering shares to employees) and Model 6 (share repurchases associated with maintaining company value) report estimates considering the difference in repurchase motives. Panel A of Table 6 shows extremely large firms, of which firm size is larger than 75% of total sample firms, while Panel B of Table 6 shows large firms, of which firm size is larger than 50% of total sample firms. The results from Panel B are similar to those of full samples. However, the results in Panel A are partially qualitatively different from the results of full samples. More specifically, by contrast, the coefficient estimates of the choice-to-pay model (Model 5 in Table 6) appear to be negative and significant. Noteworthily, the Models 2 and 5 both show the estimated coefficients (DIVID and REPUR) are negative and significant, which means the relationship between cash dividends and share repurchases to transfer shares to employees becomes substitution. In other words, the empirical result of Jagannathan and Stephens (2003) is supported for the extremely large and established Taiwanese firms regardless of choice-to-pay model or choice-to-dollar amount model. This might result from the fact that paying stock dividends has recently become unfavorable in Taiwan.1 Furthermore, regarding the effect of repurchase motives on corporate payout policy for extremely large firms, contrary to the full sample model, share repurchase motivation is seemingly related to corporate payout policy. This is especially true for the choice-to-pay model, in which the relationship between cash dividends and share repurchases to transfer shares to employees is substitution, while the relationship between cash dividends and share repurchases associated with maintaining company value becomes complementary instead. Concerning share repurchases associated with maintaining company value (Model 6 in Table 6), this finding supports that of Grullon and Michaely (2002).

1 Even though the payment objectives of stock dividends (for shareholders) and share repurchases to transfer shares to

employees differ, we conjecture that the fade effect of stock dividends might spillover to share-repurchase activities.

International Research Journal of Finance and Economics - Issue 82 (2012) 120

Table 6: Regression estimations for Extremely and Large firms The dependent variable is cash dividends divided by earnings (DIVID_EBIT), while another dependent variable is the ratio of share repurchases to earnings (REPS_EBIT), and DIVID represents cash dividends. REPUR_TS is defined as share repurchases associated with transfering shares to employees while REPUR_MV is defined as share repurchases associated with maintain company value. REPUR (Dummy) and DIVID (Dummy) indicate a dummy variable. LSIZE is the natural logarithm of total assets. DR is the debt ratios. FCF is the free cash flow. ROA is the return on assets. BIG is the percentage of outstanding shares held by big shareholders. MB is the ratio of the market value of the firms assets to its book value. FI is foreign investor ownership. DOMESTIC is domestic institutional investor ownership. ELEC DUMMY is an indicator variable that is equal to one if a firm belongs to an electronics industry, and zero otherwise. Other control variables include LSIZE, DR, FCF, ROA, BIG, MB, DOMESTIC, and ELEC DUMMY. Numbers in parentheses are t-statistics. Statistical significance at the 10%, 5%, and 1% levels is indicated by *, **, and ***, respectively.

Panel A: deflated by EBIT (extremely large firms)-firm size is larger than 75% of total sample firms Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Variables REPUR (EBIT) DIVID (EBIT)

REPUR_TS (EBIT)

DIVID (EBIT)

REPUR_MV (EBIT)

DIVID (EBIT)

REPUR (Dummy)

DIVID (Dummy)

REPUR_TS (Dummy)

DIVID (Dummy)

REPUR_MV (Dummy)

DIVID (Dummy)

DIVID -2.0540 (-0.5374) -3.3423** (-1.9155)

2.0972 (0.2679)

-1.5590** (-7.4281)

-1.8471** (-7.0577)

1.4706** (7.8364)

REPUR -3.1353 (-1.5867) -3.6932** (-2.1231)

-25.3812 (-0.0616)

-1.7603** (-7.7704)

-2.0309** (-7.9796)

1.4932** (4.7056)

FI 0.0065 (0.9069) 0.0117** (2.1184)

-0.3403 (-0.0549)

0.0179** (2.7018)

0.0200** (2.8869)

0.0096** (2.2097)

Other control

variables Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Panel B: deflated by EBIT (large firms)-firm size is larger than 50% of total sample firms Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Variables REPUR (EBIT) DIVID (EBIT)

REPUR_TS (EBIT)

DIVID (EBIT)

REPUR_MV (EBIT)

DIVID (EBIT)

REPUR (Dummy)

DIVID (Dummy)

REPUR_TS (Dummy)

DIVID (Dummy)

REPUR_MV (Dummy)

DIVID (Dummy)

DIVID -0.5535 (-0.3047) -1.2570

(-1.2472) -1.8112

(-0.5288) 1.5868** (12.7871)

1.4941** (11.9419)

1.7620** (11.5101)

REPUR -3.8328** (-5.7610) -3.7337** (-6.1733)

-13.0272 (-0.2979)

1.5652** (9.7939)

1.3747** (8.6703)

1.7949** (8.7983)

FI 0.0045 (1.4293) 0.0060** (2.0753)

-0.0573 (-0.1981)

0.0065 (1.1972)

0.0118** (2.3757)

0.0097* (1.8771)

Other control

variables Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

121 International Research Journal of Finance and Economics - Issue 82 (2012) In sum, in Taiwan, the full sample of share repurchase motivation seems to be unrelated to

corporate payout policy, specifically for the choice-to-pay model, as evidenced in Models 4-6 of Table 5, in which the coefficient estimates of Model 4 are qualitatively the same as those of Models 5 and 6 in Table 5, which are complementary. However, in the case of the choice-to-dollar amount, the difference in share-repurchase motivation seems to have an effect on payout policy, comparing Models 1-3 in Table 5. Model 2 is significant, but Model 1 and Model 3 are not very significant. Overall, for the full samples, the share repurchase motives are weakly related to corporate payout policy, and accordingly, only partially support the proposed hypothesis.

As for the extremely large firms, in the case of share repurchases to transfer shares to employees, this study contends that the substitution relations between share repurchases and dividends of Jagannathan and Stephens (2003) is only evidenced in the extremely large firms, while in the case of share repurchases associated with maintaining company value, this study supports the complementary relations between share repurchases and dividends of Grullon and Michaely (2002). Finally, for the case of extremely large firms, we contend that share repurchase motivation seems to be related to corporate payout policy especially for the case of the choice-to-pay model. In particular, for an extremely large and established Taiwanese firm, the share-repurchase motivation indeed affects its corporate payout policy when the firm decides to file the stock repurchase plan. Collectively, from the results of Tables 5 and 6, the empirical results from Taiwanese firms have a partial discrepancy to that of U.S. firms. The gaps might arise from the fact that (1) we used the firm login motivations instead of share repurchase frequencies in Jagannathan and Stephens (2003); (2) in previous decades, the dividend payout structure has changed and moved towards cash dividends.

5. Conclusion The requirements in Taiwan to report the motivations for filing stock repurchases allowed us to investigate such motivations in this study. Built on the earlier outstanding works by Jagannathan and Stephens (2003), and Grullon and Michaely (2002), this study examined the relation between stock repurchases and cash dividend payments using a more rigid econometric model, which assumes that the repurchase and dividend payout decision is made simultaneously in a given year. Investigating the substitution or complementary effect between stock repurchases and cash dividend payment is a rather important issue, because it can help us to understand whether the firms decision on the payout policy considers the tax advantage of share repurchases for shareholders.

Our empirical results, under full samples, indicate that the choice-to-pay model predicts the complementary relationship between cash dividends and share repurchases, regardless of share repurchase motivations, whereas the substitution relationship holds only for cash dividends and share repurchases to transfer shares to employees in the case of choice-to-dollar amount. Therefore, the difference in motivation of share repurchases weakly affects the corporate payout policy, at least in the case of choice-to-dollar amount, but has no effect on the case of choice-to-pay. The results only partially support the hypotheses. Our empirical results, particularly for extremely large firms, show by contrast that the coefficient estimates of the choice-to-pay model (Model 5 in Table 6) appear to be negative and significant. The results of comparing Models 5 and 6 in Table 5 and Table 6 indicate that the relationship between cash dividends and share repurchases to transfer shares to their own employees becomes substitution, while the relationship between cash dividends and share repurchases to maintain company value (Model 6 in Table 6) remains complementary. Looking at the Model 2 and Model 5 in Table 6, the extremely large and established Taiwanese firms would not file the share repurchase program associated with transferring shares to employees (cutting the amount of share repurchases to transfer shares to employees) as they tend to issue cash dividends (inclined to pay more cash dividends). Hence, concerning share repurchases to transfer shares to employees, the findings of this study are contrary to complementary relations between share repurchases and dividends of Grullon and Michaely (2002), though this study supports their findings regarding share repurchases associated with maintaining company value. This implies that the payout policy of extremely larger Taiwanese

International Research Journal of Finance and Economics - Issue 82 (2012) 122 firms slightly differs from non-extremely large firms. An observation of models 4-6 in Table 6 shows that the share repurchase motives affect corporate payout policy, at least regarding choice-to-pay in extremely large firms.

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Appendix 1

Variables N Maen Median S.D. DIDV_ebit 2738 0.301 0.141 0.546 DIDV_asset 2820 0.033 0.010 0.083 REPS_ebit 2738 54.430 0 492.086 REPS_asset 2820 3.894 0 22.767 LSIZE 2820 6.858 6.785 0.542 DR 2820 0.404 0.4 0.172 FCF 2820 0.058 0.06 0.102 ROA 2820 0.072 0.07 0.084 BIG 2820 0.296 0.27 0.169 MB 2820 1.406 1.15 0.950 FI 2820 9.222 3.205 13.364 DOMESTIC 2820 10.984 5.21 14.132 ELEC DUMMY 2820 0.361 0 0.480