STOCK REPURCHASES · Stock Repurchases in the 21st Century: Theory, Evicence and Implications

Periodic Report Summary 2 - STOCK REPURCHASES (Stock repurchases in the 21st century: theory, evidence and implications)

The project primary objectives are to understand the economic properties and limitations of repurchases, to understand how repurchases are used by companies, the manner in which they are affected by regulation, and to offer guidance to regulators about how to make repurchases an efficient payout mechanism. The project covers both theoretical and empirical studies that partly overlap in content and in time. The theoretical analysis now comprises of three studies. The first theoretical study is about execution of open market repurchase programmes - the most common method companies use to repurchase stock. The study suggests that the execution of these programs depends on availability of free cash and market conditions. This work also incorporates empirical tests that strongly support the theoretical results. This study was published in a leading finance journal, The Journal of Financial Markets. The citation is: 'Optimal execution of open-market stock repurchase programmes'. Journal of Financial Markets, 2009, 12, 832-869. The second theoretical study focuses on the manner in which firms choose their stock repurchase method, given agency costs of free cash flow and information asymmetry. Specifically, this work compares tender offers to open market repurchase programs, and suggests open market programs are much more common than tender offers because tender offers are costly, as they tend to be executed at a high premium while open-market repurchase programs are executed at the market price. However, when it is important for the firm to repurchase shares quickly, tender offers are advantageous, because due to regulation, open-market programs may take very long to complete. This study was published in another leading finance journal, The Journal of Banking and Finance. The citation is 'Distributing cash with stock repurchases: tender offers versus open market programmes'. Journal of Banking and Finance, 35, 3174-3187. The third theoretical study investigates how firms determine their general payout policy, namely how they choose between repurchases and dividends. The study suggests that dividends should be used as a payout mechanism when information asymmetry is high and when it is important to disburse the cash quickly. Otherwise, stock repurchases are a better tool for disbursing free cash. This study is a working paper titled 'Payout policy, financial flexibility, and agency costs of free cash flow'. Independently, two empirical investigations were performed. The first considers the new practice of accelerated repurchases, which has been growing dramatically in recent years. In this work, we argue that accelerated repurchases are bad for the shareholders because opportunistic managers take advantage of them to get the shares today and pay tomorrow's price when they expect the shares to perform poorly in the future. We provide empirical evidence to support this hypothesis. The results of this study were published in The Financial Analysts Journal, which is also considered a top-tier finance journal, and by far the best practitioner-oriented journal in finance. The citation is 'Not all buybacks are created equal: the case of accelerated stock repurchases', 2010, 66 (6), 55-72. This is a joint publication with Allen Michel and Israel Shaked at Boston University. The second empirical study comprises of an empirical investigation of the execution of repurchases. This is a 'heavy' investigation that involved manual collection of data and analysis with the help of research assistance. The data has been collected and analysed, and the results were presented in major conferences this summer. The study is has generated a working paper titles 'Payout policy, financial flexibility and agency costs of free cash flow'.

Data: CORDIS, © European Union