Real Effects of Share Repurchases Legalization on Corporate Behaviors
23 Pages Posted: 7 Dec 2020 Last revised: 15 Mar 2021
Date Written: March 15, 2021
Abstract
We use staggered share repurchases legalization from 1985 to 2010 across the world to examine its impact on corporate behaviors. We find that share-repurchasing firms do not cut dividends as a substitution. The cash for repurchasing shares comes more from internal cash than external debt issuance, leading to reductions in capital expenditures and R&D expenses. While this strategy boosts stock prices, it results in lower long-run Tobin’s Q, profitability, growth, and innovation, accompanied by lower insider ownership. Tax benefits and paying out temporary earnings are two primary reasons that firms repurchase.
Keywords: Share repurchases, payout, investment, innovation, firm performance
JEL Classification: G35, G38, G32
Suggested Citation: Suggested Citation