Free Cash Flow or Market Timing: What Really Drives Share Repurchases?
University of Southern California - Marshall School of Business - Finance and Business Economics Department
November 17, 2014
Market-timing opportunities only marginally influence managers’ share-repurchase decisions, as most firms with attractive timing opportunities fail to buy back stock. In contrast, the desire to distribute free cash flow (FCF) has much stronger effects on managerial repurchase decisions. Firms with poor market-timing opportunities and high FCF are more than 12 times as likely to buy back shares as firms with good market-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 the average post-repurchase abnormal returns are positive, this finding is driven by the extreme abnormal stock returns following a modest number of repurchases that are small in dollar magnitude and that account for 6% of the aggregate dollar value repurchased.
Number of Pages in PDF File: 45
Keywords: Share repurchases, Stock buybacks, Market timing, Free cash flow, FCF, Payout policy
JEL Classification: G35working papers series
Date posted: October 13, 2013 ; Last revised: November 18, 2014
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