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The Cost of Financial Flexibility: Evidence from Share Repurchases

51 Pages Posted: 3 Jan 2012 Last revised: 2 Feb 2016

Alice A. Bonaime

University of Arizona

Kristine Watson Hankins

University of Kentucky

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics

Date Written: February 2, 2016

Abstract

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

Bonaime, Alice A. and Hankins, Kristine Watson and Jordan, Bradford D., The Cost of Financial Flexibility: Evidence from Share Repurchases (February 2, 2016). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1977654 or http://dx.doi.org/10.2139/ssrn.1977654

Alice A. Bonaime (Contact Author)

University of Arizona ( email )

Eller College of Management
Department of Finance
Tucson, AZ 85721
United States

Kristine Watson Hankins

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-4887 (Phone)
859-257-9688 (Fax)

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