As a matter of convenience, some investors prefer dividends.  These tend to be investors living on current income.  Other investors prefer capital gains, for tax reasons.  A share repurchase allows investors to choose their preferred cash flow pattern.  McGowan (2005) shows different patterns of dividends that investors may choose. 

McGowan, Carl B., Jr.  “A Simplified Approach to Demonstrating the Irrelevance of Dividends to the Value of the Firm,” Applied Financial Economics Letters, Volume 1, Number 2, 2005, pp. 121-124.

Another important consideration is the signalling effect. There is a wealth of evidence to show that managers will maintain existing levels of dividends to avoid sending a negative signal to the market regarding the firm's future earning prospects and the resulting fall in the firm's share price. Firms that have a current level of dividends are therefore likely to continue paying dividends rather than using a share repurchase. By the same token if the firm's management is positive about the firm's future prospects and wants to signal this to the market they may choose to increase the level of their cash dividends rather than use a share repurchase as it is expected that the market will give greater significance to a dividend increase which is expected to be permanent rather than a share repurchase which does not represent the same level of commitment from the firm to maintain that level of payment.

Thank you prof Carl and Barry for your inputs. I got some insights from the suggested reference too.

Technically, this is known as allotment. There are several reasons that may warrant allotment choice.

1- The shareholders choice i.e. when the shareholders prefer allotment of shares to dividend.

2- Other shareholders may prefer and demanded cash dividend because it is their major source of income and have no interest in an additional investment in the company in question.

3- The company may need additional funds to boost its operation, thus, instead of distribution of dividends the management decides to retain the returns/revenues and and allot shares to the investors that are equivalent to the respective shareholder's dividend. Thus, there is no need for issuing of new shares to new investors.

However, the reasons stated above have consequences or entails a tradeoff on the part of the management or company:

1- The shares allotment in replace of cash dividends demanded that the price/value of the share is reduced i.e. less than its nominal value "under its par value". Management might consider this option not encouraging if such a move would not solve the problem that warranted such an action.

2- If the company's share has appreciated above par i.e. "it is at premium" in the current share market or stock exchange perhaps "above par value" which would attract more investors and increase the company's capital generation. Thus, it would seems not smart enough for the company to retain dividends and making allotments that are less value than issuing new shares to new investors.

please hope it is satisfactory......

The basic answer is that share repurchases are great when the share price is undervalued, and not-so-great when the share price is overvalued. To put it into a more useful context, if you would otherwise reinvest your dividends or invest new capital into the company at current stock prices, then share repurchases are useful to you because the company basically does it for you. The alternative is that the company could pay you a higher dividend, but you’d be taxed on that dividend and reinvest it into the company anyway. On the other hand, if you would not reinvest dividends or invest new capital into the company at current prices, then share repurchases are not in alignment with your current outlook, and it would be better for you to receive a higher dividend.

They do so because the reputation of the firm improves when it is associated with dividends. Share repurchase on the other hand is a bad signal for serious investors will view that company as a collapsing one. This is the reason why firms opt to pay dividends no matter how small the amount may be.

main reason is that create good name to the company among the general public through giving dividend as cash than purchase their own shares from shareholders.another reason it'll be the good signal for the company to capture market shares and to grow as expected.

You may be also in front of a "clientele effect". I mean old and retired people may need revenues, and prefer some regular payments, instead of non constrained share repurchases.

Hi,

You may find relevant information in this paper:

A A  Bonaime, K W Hankins, B D Jordan, "The cost of financial flexibility: Evidence from share repurchases", Journal of corporate finance, 2016, 38, p 345 -362.

Best regards.

Hi,

This is the clientele effect:

Erdem Ucar "Local Culture and Dividends" Financial Management, Spring 2016 , Vol 45 (1), pages 105–140.

Best regards.