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How do stock repurchases affect bank holding company performance?

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  • Beverly Hirtle

Abstract

Using data from bank holding company regulatory reports, we examine the relationship between stock repurchases and financial performance for a large sample of bank holding companies over the years 1987 to 1998. The primary result is that higher levels of repurchases in one year are associated with higher profitability and a lower share of problem loans in the subsequent year. This finding is robust to several different ways of measuring share repurchase activity. Our results appear to be driven primarily by bank holding companies with publicly traded stock, especially those companies whose stock is traded on major exchanges. ; The finding that higher repurchases are followed by better financial performance is consistent with at least two distinct behavioral hypotheses. First, bank holding company managers may opt to return excess funds to shareholders when they have limited outside investment opportunities. Alternatively, managers may choose to increase repurchases when they have private information suggesting that the future profitability of the bank is likely to be strong. We find evidence suggesting that the repurchase-performance link may be driven by different factors for different types of bank holding companies. In particular, the evidence is consistent with the first hypothesis for banks traded on major stock exchanges, but only weakly supports this explanation for smaller, closely held companies.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 123.

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Date of creation: 2001
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Handle: RePEc:fip:fednsr:123

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Keywords: Bank holding companies ; Bank stocks ; Repurchase agreements;

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References

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  1. Choi, Dosoung & Chen, Sheng-Syan, 1997. "The Differential Information Conveyed by Share Repurchase Tender Offers and Dividend Increases," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 20(4), pages 529-43, Winter.
  2. 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.
  3. Beverly Hirtle, 1998. "Bank holding company capital ratios and shareholder payouts," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 4(Sep).
  4. 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.
  5. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
  6. Elizabeth S. Laderman, 1995. "Bank stock repurchases," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec29.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. George W. Fenn & Nellie Liang, 1999. "Corporate payout policy and managerial stock incentives," Finance and Economics Discussion Series 1999-23, Board of Governors of the Federal Reserve System (U.S.).
  9. David Ikenberry & Josef Lakonishok & Theo Vermaelen, 1994. "Market Underreaction to Open Market Share Repurchases," NBER Working Papers 4965, National Bureau of Economic Research, Inc.
  10. 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.
  11. Houston, Joel F. & James, Christopher, 1995. "CEO compensation and bank risk Is compensation in banking structured to promote risk taking?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 405-431, November.
  12. Marcia Millon Cornett & Hamid Mehran & Hassan Tehranian, 1998. "Are Financial Markets Overly Optimistic about the Prospects of Firms That Issue Equity? Evidence from Voluntary versus Involuntary Equity Issuances by Banks," Journal of Finance, American Finance Association, vol. 53(6), pages 2139-2159, December.
  13. 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.
  14. Lakonishok, Josef & Vermaelen, Theo, 1990. " Anomalous Price Behavior around Repurchase Tender Offers," Journal of Finance, American Finance Association, vol. 45(2), pages 455-77, June.
  15. Vermaelen, Theo, 1981. "Common stock repurchases and market signalling : An empirical study," Journal of Financial Economics, Elsevier, vol. 9(2), pages 139-183, June.
  16. 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.
  17. Christine Jolls, 1998. "Stock Repurchases and Incentive Compensation," NBER Working Papers 6467, National Bureau of Economic Research, Inc.
  18. Lie, Erik, 2000. "Excess Funds and Agency Problems: An Empirical Study of Incremental Cash Disbursements," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 219-47.
  19. 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.
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