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The contribution of stock repurchases to the value of the firm and cash holdings around the world

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  • Haw, In-Mu
  • Ho, Simon S.M.
  • Hu, Bingbing
  • Zhang, Xu

Abstract

Using corporate payout data from 33 economies, this study investigates the contribution of stock repurchases to the value of the firm and cash holdings in different country-level investor protection environments. We find that stock repurchases contribute more to firm value in countries with strong investor protection than in countries with weak investor protection. We also report that dividends contribute approximately 60% more to firm value than repurchases in countries with weak investor protection. Furthermore, as the proportion of repurchases in total payouts increases, the marginal value of cash increases in countries with strong investor protection, whereas it declines in countries with weak investor protection. In a poor investor protection environment, the marginal value of cash for a firm that makes 100% of its payouts via repurchases is 12 cents lower than that for a firm that distributes 100% of its payouts via dividends. Overall, our findings highlight that stock repurchases are less effective than dividends in mitigating agency problems associated with free cash flow in countries with poor investor protection.

Suggested Citation

  • Haw, In-Mu & Ho, Simon S.M. & Hu, Bingbing & Zhang, Xu, 2011. "The contribution of stock repurchases to the value of the firm and cash holdings around the world," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 152-166, February.
  • Handle: RePEc:eee:corfin:v:17:y:2011:i:1:p:152-166
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    Cited by:

    1. Belkhir, Mohamed & Boubaker, Sabri & Derouiche, Imen, 2014. "Control–ownership wedge, board of directors, and the value of excess cash," Economic Modelling, Elsevier, vol. 39(C), pages 110-122.
    2. Jeon, Jin Q. & Ryoo, Juyoun, 2013. "How do foreign investors affect corporate policy?: Evidence from Korea," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 52-65.
    3. Chen, Sichong, 2012. "The predictability of aggregate Japanese stock returns: Implications of dividend yield," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 284-304.
    4. Reddy, Kotapati Srinivasa & Nangia, Vinay Kumar & Agrawal, Rajat, 2013. "Share repurchases, signaling effect and implications for corporate governance: Evidence from India," MPRA Paper 60147, University Library of Munich, Germany.
    5. repec:eee:mulfin:v:41:y:2017:i:c:p:1-22 is not listed on IDEAS
    6. repec:spr:rvmgts:v:11:y:2017:i:4:d:10.1007_s11846-016-0206-z is not listed on IDEAS
    7. Lee, Bong Soo & Suh, Jungwon, 2011. "Cash holdings and share repurchases: International evidence," Journal of Corporate Finance, Elsevier, pages 1306-1329.

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