The Cost of Financial Flexibility: Evidence from Share Repurchases
51 Pages Posted: 3 Jan 2012 Last revised: 2 Feb 2016
Date Written: February 2, 2016
Over the last two decades, share repurchases have emerged as the dominant payout channel, offering a more flexible means of returning excess cash to investors. However, little is known about the costs associated with payout-related financial flexibility. Using a unique identification strategy, we document a significant cost. We find that actual repurchase investments underperform hypothetical investments that mechanically smooth repurchase dollars through time by approximately two percentage points per year on average. This cost of financial flexibility is correlated with earnings management, managerial entrenchment, and less institutional monitoring.
Keywords: Financial flexibility, payout policy, share repurchase, earnings management, corporate governance
JEL Classification: G30, G34, G35
Suggested Citation: Suggested Citation