Commitment versus Financial Flexibility in Payout Decisions: Evidence from 10b5-1 Preset Repurchase Plans

73 Pages Posted: 29 Jan 2015 Last revised: 20 May 2018

Alice A. Bonaime

University of Arizona

Jarrad Harford

University of Washington

David Moore

University of Kentucky, Gatton College of Business and Economics

Date Written: March 24, 2018

Abstract

We are the first to document and study the use of Rule 10b5 1 preset repurchase plans. Though the Rule’s original intent was to clarify conditions for enforcing insider trading laws, generally thought to apply to individuals classified as firm insiders, we find strong use of the Rule at the firm level to repurchase company stock. We exploit this new and widespread form of payout to examine an issue at the core of payout decisions—the tradeoff between commitment and financial flexibility. 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: Firms with alternative sources of financial flexibility are more likely to pre-commit to a repurchase plan, as are firms with a history of poor repurchase timing and firms constrained by blackout windows. 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. Lastly, we find that preset repurchase plans represent a unique payout tool whose introduction encouraged a different set of firms to buy back stock and significantly altered the payout landscape.

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

Bonaime, Alice A. and Harford, Jarrad and Moore, David, Commitment versus Financial Flexibility in Payout Decisions: Evidence from 10b5-1 Preset Repurchase Plans (March 24, 2018). Available at SSRN: https://ssrn.com/abstract=2557005 or http://dx.doi.org/10.2139/ssrn.2557005

Alice A. Bonaime

University of Arizona ( email )

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

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

David Moore (Contact Author)

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

Lexington, KY
United States

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