The Contribution of Stock Repurchases to the Value of Firm and Cash Holdings Around the World

38 Pages Posted: 16 Mar 2010

See all articles by In-Mu Haw

In-Mu Haw

Texas Christian University - M.J. Neeley School of Business

Simon S. M. Ho

University of Macau - Faculty of Business Administration

Bingbing Hu

Hong Kong Baptist University (HKBU)

Xu Zhang

University of Macau

Date Written: March 16, 2010

Abstract

Using corporate payout data from 33 economies around the world, this study investigates the relations among stock repurchases, dividends and firm value (as well as cash value) under different investor protection environments. We find that stock repurchases contribute more to firm value in countries with strong investor protection than in countries with weak investor protection, and that dividends contribute more to firm value than stock repurchases in countries with weak investor protection. More specifically, we report that dividends contribute approximately 60% more to firm value than stock repurchases in countries with weak investor protection. Furthermore, the marginal value of cash increases with the proportion of stock repurchase in total payouts (the sum of dividends and repurchases) in countries with strong investor protection, while it declines with the stock repurchase proportion in weak investor protection countries. In countries with poor protection, the marginal value of cash for a firm that makes 100% of its payouts via repurchases is 12 cents lower than that for a firm that distributes 100% of its payouts via dividends. Overall, our findings highlight that cash dividends are more effective than stock repurchases in mitigating agency problems of free cash flow in countries with poor investor protection.

Keywords: Stock Repurchase, Dividends, Firm value, Cash holdings, Investor protection institutions

JEL Classification: G34, G35, G38

Suggested Citation

Haw, In-Mu and Ho, Simon S. M. and Hu, Bingbing and Zhang, Xu, The Contribution of Stock Repurchases to the Value of Firm and Cash Holdings Around the World (March 16, 2010). Available at SSRN: https://ssrn.com/abstract=1572265 or http://dx.doi.org/10.2139/ssrn.1572265

In-Mu Haw

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States
817-921-7563 (Phone)
817-921-7227 (Fax)

Simon S. M. Ho

University of Macau - Faculty of Business Administration ( email )

Macau

Bingbing Hu

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Xu Zhang (Contact Author)

University of Macau ( email )

Macau

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