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Motivation for Repurchases: A Life Cycle Explanation

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  • Woan-lih Liang
  • Konan Chan
  • Wei-Hsien Lai
  • Yanzhi Wang

Abstract

This study examines the motives for share repurchases. Whereas most prior research points to either the signaling or free cash flow hypothesis, we find that the motives for repurchases differ depending on the firm’s life cycle stage. Specifically, we find that a firm in the growth stage tends to announce a repurchase program to signal its undervalued stock whereas a firm in the mature stage is prone to buy back shares to dispense excess free cash flow. We also find that the market reaction to repurchase announcements corroborates this life-cycle argument. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Woan-lih Liang & Konan Chan & Wei-Hsien Lai & Yanzhi Wang, 2013. "Motivation for Repurchases: A Life Cycle Explanation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 43(2), pages 221-242, April.
    • Handle: RePEc:kap:jfsres:v:43:y:2013:i:2:p:221-242
    DOI: 10.1007/s10693-011-0126-7
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    1. Vinh Huy Nguyen & Suchismita Mishra & Pankaj K. Jain, 2022. "Institutional trading around repurchase announcements: An uphill battle," The Financial Review, Eastern Finance Association, vol. 57(3), pages 485-507, August.
    2. Chuang, Kai-Shi, 2017. "Corporate life cycle, investment banks and shareholder wealth in M&As," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 122-134.
    3. Kai-Shi Chuang, 2020. "Private placements, market discounts and firm performance: the perspective of corporate life cycle analysis," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 541-564, February.
    4. Grey, Colette & Flynn, Antoinette & Donnelly, Ray, 2020. "Management compensation contracts and distribution policies in the US technology sector," International Review of Financial Analysis, Elsevier, vol. 67(C).
    5. Jasminder Kaur, 2019. "Firm’s Life Cycle Spurs the Dividend Payments: A Fallacy or an Actuality?," Paradigm, , vol. 23(1), pages 36-52, June.
    6. Han-Ching Huang & Yong-Chern Su & Hsin-Ying Wang, 2015. "Market Efficiency around the Announcement Day of Self-Tender Offers," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(1), pages 121-128.
    7. Cholifah Bahri & Mahsina S. E & Asmie Poniwati, 2017. "The influence of undervaluation, free cash flow, leverage and dispersion of ownerships toward company’s stock repurchase (An empirical study of Indonesia stock exchange public listed companies)," Journal of Administrative and Business Studies, Professor Dr. Usman Raja, vol. 3(5), pages 235-247.

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    More about this item

    Keywords

    Repurchase; Life cycle; Signaling; Free cash flow; G35; G30;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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