The Persistence and Consequences of Share Repurchases

Abstract

Firms primarily use cash flow to finance increasingly persistent share repurchases. This internal financing is accompanied by gradual increases in retained earnings in the capital structure and results in high (low) repurchase (investment) sensitivity to cash flow. These effects are particularly pronounced among financially mature firms. During recent decades, the repurchase–cash flow sensitivity of U.S. firms has increased steadily, with steeper increases for financially mature firms. Repurchases do not appear to be associated with underinvestment. A non-trivial number of firms would have depleted their retained earnings had they paid dividends rather than repurchased shares.

Keywords: Share repurchases, valuation, cash flow, retained earnings, capital structure, firm maturity

JEL Classification: G31, G32, G35