Making Capital Structure Support Strategy

The signaling effect is probably the most important consideration in deciding between dividends and share repurchases. Companies should also consider differences in the taxation of dividends and share buybacks, as well as the fact that shareholders have the option of not participating in a repurchase, since the cash they receive must be reinvested.

While these tax and signaling effects are real, they mainly affect tactical choices about how to move toward a defined long-term target capital structure, which should ultimately support a company's business strategies by balancing the flexibility of lower debt with the discipline (and tax savings) of higher debt.

About the Authors
Marc Goedhart is an associate principal in McKinsey's Amsterdam office; Tim Koller is a partner and Werner Rehm is a consultant in the New York office.

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