Cash Holdings and Share Repurchases: International Evidence

Abstract

In this study, we examine the patterns and determinants of share repurchases using firm-level data from seven major countries - Australia, Canada, France, Germany, Japan, the U.K., and the U.S.- over the period 1998-2006. We find that while non-U.S. firms do not repurchase shares as much as U.S. firms do, both U.S. and non-U.S. firms display a common set of share repurchase behaviors. For example, across countries, firms use share repurchases as a flexible means of distributing cash. More importantly, large cash holdings are significantly associated with the amount of share repurchases in all countries. There is evidence that large cash holdings held by repurchasing firms represent excess cash. Firms tend to experience substantial increases in cash holdings prior to share repurchase as a result of reductions in capital expenditures. Overall, our evidence lends support to two hypotheses: (i) firms discharge excess capital to reduce agency conflicts and (ii) firms use repurchases to distribute temporary cash flows.

Keywords: share repurchase, cash holdings, free cash flow, temporary cash flow

JEL Classification: G35, G15