Increasing Shareholder Value? A Study of Share Repurchases
21 Pages Posted: 19 Sep 2011 Last revised: 16 Mar 2012
Date Written: February 13, 2011
We consider motivations for firm share repurchases using the financial crisis of 2008-2009 as a unique instrument which induces a shock to firm profitability while being exogenous to the firm. We find that many classical hypotheses about buybacks are not supported by the data: Buybacks are often not used in the flexible manner that would be suggested by their requiring no formal commitments; buybacks are not always the first payout method to be eliminated; and, buybacks do not always increase shareholder value. Buybacks are also sometimes accompanied by firms increasing their risk. Finally, we explore whether buybacks might be used to defend against hostile acquirers and whether buybacks might present agency issues. We find that buybacks are used to defend against hostile acquisitions. Further, we find that buybacks present significant agency issues and can even allow for direct transfers of wealth from the firm to management.
Keywords: share repurchases, shareholder value, executive compensation, bond covenants
JEL Classification: G35, G31, G32
Suggested Citation: Suggested Citation