Commitment versus Financial Flexibility in Payout Decisions
59 Pages Posted: 29 Jan 2015 Last revised: 26 Jan 2017
Date Written: January 20, 2017
We exploit a new and growing form of payout—Rule 10b5-1 preset repurchase plans—to examine the tradeoff between commitment and financial flexibility in payout decisions. Relative to open market repurchases, preset plans provide an expanded repurchase window and increased legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates, with more positive market reactions, and with more dividend substitution than open market repurchases.
Keywords: Share repurchase; share buyback; Rule 10b5-1; preset trading plan; accelerated share repurchase; payout policy; financial crisis; repurchase plan completion rates; announcement returns; financial flexibility; blackout windows
JEL Classification: G35, G24, G30
Suggested Citation: Suggested Citation