Do Strategic Share Repurchase Programs Create Long-Run Firm Value
University of Illinois Working Paper #99-0119
Posted: 9 Jan 2000
An unresolved question is?Do strategic repurchase programs create long-run firm value? An objective of this paper is to analyze the long-run growth in value of companies that strategically repurchase shares vis-a-vis those that do not pursue a share buyback strategy. Prior studies have not focused on the linkage between share repurchases and the growth in firm value. The analysis focuses on the hypothesis that the growth in the value of firms initiating repurchase strategies is greater than the growth in the value of the matched companies. The results show that in the short-run companies that pursue a strategy of repurchasing shares have a higher growth rate than compnies not exercising a buyback strategy. However, the results are not statistically significant.
The study indicates that in the long-run firms create more value with a strategy of not repurchasing its shares. Additionally, it was discovered that small and mid-size non-repurchasing companies outperform firms employing a share buyback strategy. Regression analysis was used to test the relationship between growth in firm value and the performance of the free cash flow components of the two types of firms in the sample. The results show that investment by non-repurchasing companies in net working capital and capital projects were instrumental in their outperforming companies using a repurchase strategy. In conclusion, the findings do not support the theory that share repurchase programs are related to management signaling an increase in a firm?s long-run performance in the market. Nor does the study show that a strategy to repurchase shares signals that shares are undervalued.
JEL Classification: G32
Suggested Citation: Suggested Citation