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Changing Motives for Share Repurchases

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  • Weston, J. Fred
  • Siu, Juan A.
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    Abstract

    Net share repurchases have increased both in absolute terms and relative to cash dividends. Share repurchases during 1975-87 were predominantly fixed price tender offers and Dutch auctions, mainly signaling undervaluation. By 1994 open market repurchases (OMRs) represented over 95% of repurchase activity. Event returns were 10% to 15% for the early period. OMRs during the 1980s had initial event returns of about 3.5%, but had four-year buy-and- hold returns of 12% and higher. By the mid 1980s share repurchases took the form of multi- year programs with annual levels as high as $2-$3 billion. Econometric studies of the 1990s are consistent with the hypothesis that a major motive was to offset the dilution effects of the exercise of stock options. Dividend patterns were related to permanent components of cash flow patterns while share repurchases were associated with more transitory cash flow changes. Dividend paying firms were almost two-third of publicly traded, non- financial, nonutility firms in 1978, but declined to 20.8% in 1999. Non-dividend paying firms were characterized by higher investment rates, higher R&D rates, higher market-to-book ratios, and relatively small size. Firms which began share repurchases in the 1990s have similar characteristics. The use of stock options enabled these firms to make cash payouts based on the discounted values of optimistic expectations of future net cash flows and stimulated the use of share repurchases as documented. In contrast, dividend paying firms with earning increases accounted for a high concentration of payouts, were large and more mature, and were responsible for the secular rise in aggregate dividend payouts. Thus share repurchases did not substitute for dividends but performed different functions.

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    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt9146588t.

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    Date of creation: 19 Dec 2003
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    Handle: RePEc:cdl:anderf:qt9146588t

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    1. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79.
    2. Daniel A. Bens, 2002. "Real Investment Implications of Employee Stock Option Exercises," Journal of Accounting Research, Wiley Blackwell, vol. 40(2), pages 359-393, 05.
    3. Mark L. Mitchell & Erik Stafford, 1997. "Managerial Decisions and Long-Term Stock Price Performance," CRSP working papers 453, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    4. Gustavo Grullon & David L. Ikenberry, 2000. "What Do We Know About Stock Repurchases?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(1), pages 31-51.
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    6. J. Nellie Liang & Steven A. Sharpe, 1999. "Share repurchases and employee stock options and their implications for S&P 500 share retirements and expected returns," Finance and Economics Discussion Series 1999-59, Board of Governors of the Federal Reserve System (U.S.).
    7. Vermaelen, Theo, 1981. "Common stock repurchases and market signalling : An empirical study," Journal of Financial Economics, Elsevier, vol. 9(2), pages 139-183, June.
    8. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 2000. "Special dividends and the evolution of dividend signaling," Journal of Financial Economics, Elsevier, vol. 57(3), pages 309-354, September.
    9. Franklin Allen & Antonio Bernardo & Ivo Welch, 1998. "A Theory of Dividends Based on Tax Clienteles," Yale School of Management Working Papers ysm92, Yale School of Management.
    10. Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, vol. 53(1), pages 313-333, 02.
    11. Fenn, George W. & Liang, Nellie, 2001. "Corporate payout policy and managerial stock incentives," Journal of Financial Economics, Elsevier, vol. 60(1), pages 45-72, April.
    12. Dann, Larry Y., 1981. "Common stock repurchases : An analysis of returns to bondholders and stockholders," Journal of Financial Economics, Elsevier, vol. 9(2), pages 113-138, June.
    13. Nohel, Tom & Tarhan, Vefa, 1998. "Share repurchases and firm performance:: new evidence on the agency costs of free cash flow," Journal of Financial Economics, Elsevier, vol. 49(2), pages 187-222, August.
    14. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208.
    15. Bagwell, Laurie Simon, 1992. " Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity," Journal of Finance, American Finance Association, vol. 47(1), pages 71-105, March.
    16. Nobuyuki Isawaga, 2002. "Open-Market Repurchase Announcements,Actual Repurchases,and Stock Price Behavior in Inefficient Markets," Financial Management, Financial Management Association, vol. 31(3), Fall.
    17. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
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    Cited by:
    1. Michel Albouy & Tania Morris, 2006. "Les rachats d’actions au Canada:motivations et impact de l’activité économique," Revue Finance Contrôle Stratégie, revues.org, vol. 9(4), pages 5-32, December.
    2. Choy, HiuLam & Gul, Ferdinand A. & Yao, Jun, 2011. "Does political economy reduce agency costs? Some evidence from dividend policies around the world," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 16-35, January.
    3. Robert A. Weigand & H. Kent Baker, 2009. "Changing perspectives on distribution policy: The evolution from dividends to share repurchase," Managerial Finance, Emerald Group Publishing, vol. 35(6), pages 479-492, May.

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