Real Effects of Share Repurchases Legalization on Corporate Behaviors

23 Pages Posted: 7 Dec 2020 Last revised: 15 Mar 2021

See all articles by Zigan Wang

Zigan Wang

Tsinghua University; The University of Hong Kong - School of Economics and Finance; Columbia University

Qie Ellie Yin

Hong Kong Baptist University

Luping Yu

Xiamen University - Department of Finance

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

Wang, Zigan and Yin, Qie Ellie and Yu, Luping, Real Effects of Share Repurchases Legalization on Corporate Behaviors (March 15, 2021). Journal of Financial Economics 140, no.1 (2021): 197-219., Available at SSRN: https://ssrn.com/abstract=3607200

Zigan Wang

Tsinghua University ( email )

Beijing, 100084
China

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Qie Ellie Yin (Contact Author)

Hong Kong Baptist University ( email )

WLB 807, 34 Renfrew Road
Hong Kong Baptist University
Kowloon Tong, 0000
Hong Kong
(852)34115792 (Phone)

Luping Yu

Xiamen University - Department of Finance ( email )

Xiamen, Fujian 361005
China

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