Do Share Repurchases Crowd Out Investment? Evidence of R&D Investment Distortion

57 Pages Posted: 26 Jun 2017

See all articles by Samuel L. Tibbs

Samuel L. Tibbs

American University of Sharjah - School of Business and Management

Zaher Zantout

American University of Sharjah

Date Written: September 27, 2016

Abstract

We show that the manager of a sufficiently undervalued firm is incentivized to allocate financial slack for a share repurchase to gain an immediate, risk free, and corporate tax free wealth transfer from uninformed shareholders, instead of undertaking a real investment with long term, risky, and taxable payoff. We also find U.S. firms reduce their R&D intensity by more than one-fourth during irregular repurchases, and the evidence does not support the latter is due to diminished investment opportunities. Evidently, financial slack at an undervalued firm does not necessarily alleviate the underinvestment problem as proposed by Myers and Majluf (1984).

Keywords: Share repurchases, R&D investment, Information asymmetry, Mandatory corporate disclosures

JEL Classification: E22, G31, G35, G38, K34

Suggested Citation

Tibbs, Samuel L. and Zantout, Zaher, Do Share Repurchases Crowd Out Investment? Evidence of R&D Investment Distortion (September 27, 2016). Available at SSRN: https://ssrn.com/abstract=2991368 or http://dx.doi.org/10.2139/ssrn.2991368

Samuel L. Tibbs (Contact Author)

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates
971 06 515 4169 (Phone)

Zaher Zantout

American University of Sharjah ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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