Good news and bad news about share repurchases
AbstractWe estimate the cross-sectional relationship between open market repurchases and accounting data for a large sample of dividend- paying and non-dividend paying firms over a twelve year period (1984-95). Consistent with the hypothesis that firms use open market repurchases to reduce the agency costs of free cash flow, we find that repurchases are positively related to proxies for free cash flow and negatively related to proxies for marginal financing costs. We also examine the extent to which management stock options influence the choice between open market repurchases and dividend payments. Because the value of management stock options--like any call option--is negatively related to expected future dividend payments, management can increase the value of its stock options by substituting share repurchases for dividend growth. We find evidence that such substitution occurs: for dividend-paying firms, share repurchases are positively related and dividend increases are negatively related to a proxy for management stock options, whereas for non-dividend-paying firms, the relationship between repurchases and options is weak and statistically insignificant.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1998-04.
Date of creation: 1997
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
- Smith, Clifford Jr. & Watts, Ross L., 1992.
"The investment opportunity set and corporate financing, dividend, and compensation policies,"
Journal of Financial Economics,
Elsevier, vol. 32(3), pages 263-292, December.
- Smith, C.W. & Watts, R.L., 1992. "The Investment Oppotunity set and Corporate Financing, Dividend and Compensation Policies," Papers 92-02, Rochester, Business - Financial Research and Policy Studies.
- Laurie Simon Bagwell & John B. Shoven, 1988. "Share Repurchases and Acquisitions: An Analysis of Which Firms Participate," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 191-220 National Bureau of Economic Research, Inc.
- 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.
- 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.
- Comment, Robert & Jarrell, Gregg A, 1991. " The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases," Journal of Finance, American Finance Association, vol. 46(4), pages 1243-71, September.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Vermaelen, Theo, 1984. "Repurchase Tender Offers, Signaling, and Managerial Incentives," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 163-181, June.
- David Yermack, 1996.
"Good Timing: CEO Stock Option Awards and Company News Announcements,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
96-41, New York University, Leonard N. Stern School of Business-.
- Yermack, David, 1997. " Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-76, June.
- Lambert, Richard A. & Lanen, William N. & Larcker, David F., 1989. "Executive Stock Option Plans and Corporate Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 409-425, December.
- David Ikenberry & Josef Lakonishok & Theo Vermaelen, 1994.
"Market Underreaction to Open Market Share Repurchases,"
NBER Working Papers
4965, National Bureau of Economic Research, Inc.
- 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.
- Ofer, Aharon R & Thakor, Anjan V, 1987.
" A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchases and Dividends,"
Journal of Finance,
American Finance Association, vol. 42(2), pages 365-94, June.
- Ahron R. Ofer & Anjan V. Thakor, 2004. "A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchase and Dividends," Finance 0411031, EconWPA.
- Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
- Michael J. Barclay & Clifford W. Smith & Ross L. Watts, 1995. "The Determinants Of Corporate Leverage And Dividend Policies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 4-19.
- Chowdhry, Bhagwan & Nanda, Vikram, 1994. "Repurchase Premia as a Reason for Dividends: A Dynamic Model of Corporate Payout Policies," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 321-50.
- Lehn, Kenneth & Poulsen, Annette, 1989. " Free Cash Flow and Stockholder Gains in Going Private Transactions," Journal of Finance, American Finance Association, vol. 44(3), pages 771-87, July.
- Christine Jolls, 1998. "Stock Repurchases and Incentive Compensation," NBER Working Papers 6467, National Bureau of Economic Research, Inc.
- Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2004. "The ownership structure of repurchasing firms," Working Paper 2004/7, Norges Bank.
- Gunnar Bårdsen & Jurgen Doornik & Jan Tore Klovland, 2004.
"A European-type wage equation from an American-style labor market: Evidence from a panel of Norwegian manufacturing industries in the 1930s,"
2004/8, Norges Bank.
- Gunnar Bårdsen & Jurgen Doornik & Jan Tore Klovland, 2004. "A European-type wage equation from an American-style labor market: Evidence from a panel of Norwegian manufacturing industries in the 1930s," Working Paper 2004/4, Norges Bank.
- Stehle, Richard & Seifert, Udo, 2003. "Stock Performance around Share Repurchase Announcements in Germany," SFB 373 Discussion Papers 2003,48, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If references are entirely missing, you can add them using this form.