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The cost of financial flexibility: Evidence from share repurchases

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  • Bonaimé, Alice A.
  • Hankins, Kristine W.
  • Jordan, Bradford D.

Abstract

Over the last two decades, share repurchases have emerged as the dominant payout channel, offering a more flexible means of returning excess cash to investors. However, little is known about the costs associated with payout-related financial flexibility. Using a unique identification strategy, we document a significant cost. We find that actual repurchase investments underperform hypothetical investments that mechanically smooth repurchase dollars through time by approximately two percentage points per year on average. This cost of financial flexibility is correlated with earnings management, managerial entrenchment, and less institutional monitoring.

Suggested Citation

  • Bonaimé, Alice A. & Hankins, Kristine W. & Jordan, Bradford D., 2016. "The cost of financial flexibility: Evidence from share repurchases," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 345-362.
    • Handle: RePEc:eee:corfin:v:38:y:2016:i:c:p:345-362
    DOI: 10.1016/j.jcorpfin.2016.02.002
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    3. Geoffrey C. Friesen & Noel Pavel Jeutang & Emre Unlu, 2022. "The Effect of Unsuccessful Past Repurchases on Future Repurchasing Decisions," Management Science, INFORMS, vol. 68(1), pages 716-739, January.
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    6. Nicholas Clarke & Dylan Norris & Andrew Schrowang, 2024. "Share repurchases and managerial reference points," The Financial Review, Eastern Finance Association, vol. 59(1), pages 57-87, February.
    7. Moore, David, 2023. "Strategic repurchases and equity sales: Evidence from equity vesting schedules," Journal of Banking & Finance, Elsevier, vol. 146(C).
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    More about this item

    Keywords

    Financial flexibility; Payout policy; Share repurchase; Earnings management; Corporate governance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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