Share Repurchases, Market Timing, and the Distribution of Free Cash Flow

Abstract

Although market-timing considerations are empirically important, the desire to distribute free cash flow (FCF) has quantitatively much stronger effects on managerial decisions to repurchase stock. Firms with poor market-timing opportunities and high FCF are more than 12 times as likely to buy back shares as firms with good timing opportunities and low FCF. Firms’ decisions to buy back shares often tend to be poor in a market-timing sense as they are more likely to experience negative than positive abnormal stock returns after repurchases. Although average post-repurchase abnormal stock returns are positive, this finding is driven by extreme positive rates of return following a modest number of repurchases that are small in dollar magnitude and that account for a small portion of the aggregate dollar value repurchased.

Keywords: Share repurchases, Stock buybacks, Market timing, Free cash flow, FCF, Payout policy

JEL Classification: G35