Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 419

III. More and more firms are buying back stock, rather than

pay dividends...

This trend accelerated through the 1990s. It can be partially explained by

1. An increase in the volatility of earnings at all companies, making dividends

much more difficult to maintain

2. An increasing proportion of investors who invested primarily for capital

gains

3. Managers being compensated with options like stock buybacks more than

dividends since the latter leads to lower stock prices.