Precautionary vs Signaling Motive of Share Repurchases: Evidence from Policy Uncertainty and the COVID-19 Crisis

British Journal of Management, forthcoming

63 Pages Posted: 6 Feb 2022 Last revised: 15 Nov 2022

See all articles by Zhong Chen

Zhong Chen

King's Business School, King's College London

Zicheng Lei

King's College London

Chunling Xia

Queen Mary University of London

Date Written: February 29, 2020

Abstract

Using policy-related uncertainty as a shock to firms’ internal and external financing frictions, we find significantly lower repurchase likelihood, short-term market reactions, and post-announcement completion rate of open market share repurchases during periods of high policy uncertainty. Firms are more likely to switch from a high- to low-commitment repurchase technique when policy uncertainty is high. In contrast, for firms that are significantly undervalued ex-ante, higher policy uncertainty leads to more repurchase activities. In addition, we show that the COVID-19 crisis is associated with lower repurchase likelihood for financially constrained firms or those with high cash flow volatility, while undervalued firms repurchased more shares during the pandemic period. Our results are robust after controlling for potential sources of endogeneity and conducting a battery of robustness tests. Collectively, our evidence suggests that the relationship between uncertainty and share repurchases are conditional on institutional contexts. Firms’ level of financial flexibility, their demand for signaling, the creditability and magnitude of repurchase signals, all significantly affect their precautionary and signaling motives.

Keywords: Policy uncertainty; share repurchases; precautionary motive; signaling motive; COVID-19

JEL Classification: G32, G35, G38

Suggested Citation

Chen, Zhong and Lei, Zicheng and Xia, Chunling, Precautionary vs Signaling Motive of Share Repurchases: Evidence from Policy Uncertainty and the COVID-19 Crisis (February 29, 2020). British Journal of Management, forthcoming, Available at SSRN: https://ssrn.com/abstract=3988237 or http://dx.doi.org/10.2139/ssrn.3988237

Zhong Chen (Contact Author)

King's Business School, King's College London ( email )

Bush House
London, WC2B 4BG
United Kingdom

Zicheng Lei

King's College London ( email )

Bush House
30 Aldwych, Strand
London, WC2B 4BG
United Kingdom

Chunling Xia

Queen Mary University of London ( email )

School of Business and Management
Mile End Road
London, E1 4NS
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
81
Abstract Views
320
Rank
451,215
PlumX Metrics