Why do Firms Repurchase Shares? Evidence from Actual Share Repurchases

Abstract

In practice, the share repurchase announcement is not a commitment to managers. To this end, the large difference between the actual and announced share repurchases is often observed in markets. In this paper, we explore the implications from actual share repurchase activities, different from the existing methods which focus on the announcements of share repurchases and hence largely ignore the managers' actual repurchasing activities. By considering actual share repurchases and controlling variables, the new empirical evidence found in this paper clearly supports the agency and investor divergence of opinion hypotheses, but not for the information asymmetry hypothesis.JEL Classifications: G14, G20, G30

Share repurchases and managerial reference points

“…In order to isolate the impact of the reference point return on the current level of repurchases, we control for several variables that have been shown to influence actual repurchases. Specifically, we control for the following firm‐level variables, which are defined in Appendix A and measured as of the end of quarter t‐1 : total assets (Dittmar, 2000; Billett & Xue, 2007), market to book ratio (Ikenberry et al., 1995; Dittmar, 2000), operating profits (Stephens & Weisbach, 1998; Jagannathan et al., 2000), investments (Grullon & Michaely, 2004; Almeida et al., 2016), cash holdings (Dittmar, 2000; Oswald & Young, 2008), leverage (Bagwell & Shoven, 1989; Hovakimian et al., 2001; Dittmar, 2000), employee stock options (Jolls, 1998; Dittmar, 2000; Fenn & Liang, 2001; Bens et al., 2002), volatility (Bargeron et al., 2011), and trading volume (Liu & Wang, 2015; Hillert et al., 2016).…”