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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.

Suggested Citation

  • Beverly Hirtle, 2001. "How do stock repurchases affect bank holding company performance?," Staff Reports 123, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:123
    Note: For a published version of this report, see Beverly Hirtle, "Stock Repurchases and Bank Holding Company Performance," Journal of Financial Intermediation 13, no. 1 (January 2004): 28-57.
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    References listed on IDEAS

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    More about this item

    Keywords

    Repurchase agreements; Bank holding companies; Bank stocks;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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