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Share Repurchases and Acquisitions: An Analysis of Which Firms Participate

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  • John B. Shoven
  • Laurie Blair Simon
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    Abstract

    Firms can transmit cash to shareholders either by paying dividends or by purchasing shares. The share purchases can be either the firm's own securities or those of another firm. Recent evidence suggests that there has been a dramatic increase in the use of these nondividend payments to shareholders. This paper reviews the theories which have been offered regarding the motivation of nondividend payments. These include taxation advantages, adjustment towards optimal debt-equity ratios, anti-takeover strategies, free cash flow (agency) considerations, signaling, and habit formation or learning. From these theories, we derive and investigate econometrically potential characteristics which predict participation in the above actions for roughly 2.000 firms in 1976 and 1984. We find the variables suggested by the various hypotheses collectively have substantial power in predicting participation in share repurchase and acquisitions. The free cash flow and habit forming arguments prove most consistent with our findings. Tests for structural change across time confirm an intercept shift consistent with dramatic increases in these activities, and fail to reject that the characteristic determinants of these actions are unchanged.

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    File URL: http://www.nber.org/papers/w2243.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2243.

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    Date of creation: May 1987
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    Publication status: published as Auerbach, Alan J. (ed.) Corporate Takeovers: Causes and Consequences. Chicago: University of Chicago Press, 1988.
    Handle: RePEc:nbr:nberwo:2243

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    1. Gordon, Roger H. & Bradford, David F., 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," Journal of Public Economics, Elsevier, vol. 14(2), pages 109-136, October.
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    3. Pettit, R. Richardson, 1977. "Taxes, transactions costs and the clientele effect of dividends," Journal of Financial Economics, Elsevier, vol. 5(3), pages 419-436, December.
    4. 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.
    5. Vermaelen, Theo, 1981. "Common stock repurchases and market signalling : An empirical study," Journal of Financial Economics, Elsevier, vol. 9(2), pages 139-183, June.
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    7. Ross, Stephen A, 1985. " Debt and Taxes and Uncertainty," Journal of Finance, American Finance Association, vol. 40(3), pages 637-57, July.
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    14. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-22, September.
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    17. Schaefer, Stephen M., 1982. "Tax-induced clientele effects in the market for British government securities : Placing bounds on security values in an incomplete market," Journal of Financial Economics, Elsevier, vol. 10(2), pages 121-159, July.
    18. Masulis, Ronald W, 1980. " Stock Repurchase by Tender Offer: An Analysis of the Causes of Common Stock Price Changes," Journal of Finance, American Finance Association, vol. 35(2), pages 305-19, May.
    19. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    20. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
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    22. Dennis, Debra K. & McConnell, John J., 1986. "Corporate mergers and security returns," Journal of Financial Economics, Elsevier, vol. 16(2), pages 143-187, June.
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    Cited by:
    1. Robert S. Harris & Julian Franks & Colin Mayer, 1987. "Means of Payment in Takeovers: Results for the U.K. and U.S," NBER Working Papers 2456, National Bureau of Economic Research, Inc.
    2. Andreas Hackethal & Alexandre Zdantchouk, 2006. "Signaling Power of Open Market Share Repurchases in Germany," Financial Markets and Portfolio Management, Springer, vol. 20(2), pages 123-151, June.

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