Price Determination

Some of the research done by experts and there conclusion:



1-What determines the stock price?

The relationship of stock returns and fundamental variables has been extensively studied. There is a large amount of evidence that short and long-horizon stock returns are predict able from fundamental variables such as dividend yields. Other studies have also found that stock returns are predict able from a common set of stock market variables and the term structure of interest rates. There is however, a controversy between academicians of whether the predictability of returns from dividend yields should be taken as evidence for or against market efficiency.


Result of this research:
Real stock returns are forecastable in UK market as well, using the Dividend-price ratio. The most important finding of the tests is that the D/P ratio causes stock returns implying predicts ability which is only in consistent with the simplest model of market efficiency that postulates a constant required return. Predictability of real stock returns from dividend yields (D/P) therefore, is NOT in itself evidence for or against market inefficiency.



2- Relationship between stocks repurchases and cash dividend:

CASH DIVIDENT:

In a world free of market imperfections, MM (1961) demonstrates that neither the existence nor magnitude of dividends should affect the value of the equity shares of publicly traded corporations. Other researchers, however, show that when imperfections are considered, stock returns react significantly to announcements of changes in cash dividends.

Aharonyand Swary (1980) show that stock returns move in the direction of dividend changes. They attribute the capital market reaction to an information affect, implying that investors respond to information contained in dividend announcements. Investors react favorably to dividend increase announcements and unfavorably to dividend decrease announcements. The dividend signal has value beyond that of the absolute value of the cash dividend amount causing investors to react to the signal by inferring some news about future earnings, future dividends, future cash flows, or future asset values.
Asquith and Mullins (1986) show firms which introduce dividend payments, initially or after a ten-year absence, realize positive and significant stock returns in reaction to the announcement. Stock returns are a positive function of the size of the dividend as well.
These two papers and a host of others suggest signaling as a motive for dividend policy much like the models of Bhattacharya (1979) and Miller and Rock (1985) predict.



REDEMPTION OF SHARES:

Firms can repurchase their shares one of three general ways: open market repurchases in secondary markets, private purchases from targeted groups of very small shareholders or large block holders, or through tender offers made directly to shareholders through a financial intermediary. Tender offers can be for fixed prices or ranges of prices.

Bagwell (1992) in one of the first comprehensive studies on repurchase of shares finds that shareholders have very different sets of tendering prices. The lack of homogeneous expectations is convincing evidence that firms face upward sloping supply curves for their shares and that repurchase of shares are unique corporate events. Persons (1997) develop an asymmetric information model in which shareholders are permitted to have unique reservation prices. Shareholder heterogeneity results in a supply curve for shares that is upward sloping. Persons (1997) shows that undervalued firms will signal with repurchases and pay high premiums for their shares to make it virtually impossible for overvalued firms to mimic them. Because of the upward slope in the supply curve, a repurchase of a few shares is too costly for overvalued or less undervalued firms to undertake. These firms tend to use dividends as signals, while only the most undervalued firms attempt repurchases. The under valued firms pay high premiums for their shares as part of the high fixed costs associated with share repurchases in order to validate the signaling decision.
Concluding Remarks

This study has provided evidence that capital markets react to corporate cash distributions and that repurchase of share self-tender offers are significant corporate events. Individual firm abnormal returns can be explained using a multiple regression framework. Abnormal stock returns generated by the announcement of repurchase tender offers are positively related to repurchase premiums, repurchase ratios, and percentage ranges of offering prices. Abnormal returns are negatively related to repurchase size and non-dividend paying firms react less strongly to repurchase offers.


The results show that investors perceive that managers have private information that is revealed during the cash distribution process of both dividends and share repurchases and that signaling is a valid reason for the use of repurchase of shares. Investors are sensitive to the type of cash distribution and prefer share repurchases when dividends are not a part of corporate policy. The conclusions made are consistent with signaling theory of corporate cash disbursement.



There might be controversy between shareholders whether to give a dividend or to repurchase shares. The factor which effects this decision is tax. So the shareholders might choose the option where tax is lowest. But country like Australia the taxing is based to the wealth that person is holding. The shareholders in the high income bracket might have to pay more tax than those with the lower income tax band. Shareholders with lower tax band might be given extra money or tax subsidies by the government. This reduction is due to double taxing issue. For example the company might be taxed with 30% where else the tax rate of lower income group is 15%. Therefore, when distributing the dividend share holders in low income bracket might be given extra 15% as tax reduction. So this totally depends on the government policy whether to accept the dividend or accept the repurchase decision.








Reference:

 The Determinants of Stock Prices: Evidence from The United Kingdom Stock Market by ‘Dimitrios Tsouka las and Shomir Sil’, Volume 22 Number 5 1999
 An Investigation of the Relationship Between Dutch Auction Repurchase Tender Offers and Cash Dividend Payments Volume 26 Number 8 2000