Can Buybacks Be a Product of Shorter Shareholder Horizons?

35 Pages Posted: 16 Jan 2005

See all articles by Rajdeep Patgiri

Rajdeep Patgiri

BlackRock, Inc

Massimo Massa

INSEAD - Finance

Jose-Miguel Gaspar

ESSEC Business School

Pedro Matos

University of Virginia - Darden School of Business; European Corporate Governance Institute (ECGI)

Zahid Rehman

BlackRock

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Abstract

We examine how shareholder investment horizons influence firms' payout decisions. We find that U.S. firms held by short-term institutional investors have a higher propensity to buybacks shares instead of using dividends. Firm managers seem to respond to the preferred payout policy of investors in their shareholder base. Share buybacks are used by if managers want to appease short-term oriented shareholders, while firms pay dividends if their stock is mostly held by long-term investors who have less need to liquidate their investment and may have a better tax treatment with dividends. We document two effects of investor pressure: for firms initiating payouts through a share buyback we find that the market reaction is lower the more short-term investors are holding the firm's stock, because such payout decisions are less well monitored; for firms that have already a payout policy at present, the market reacts more positively (and only temporarily) to a buyback in line with investor catering effects. Our findings help explain some of the puzzling recent findings relating the rise in institutional investment to a higher use of share buybacks.

Suggested Citation

Patgiri, Rajdeep and Massa, Massimo and Gaspar, Jose-Miguel and Matos, Pedro and Rehman, Zahid, Can Buybacks Be a Product of Shorter Shareholder Horizons?. AFA 2005 Philadelphia Meetings Paper; EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=649482 or http://dx.doi.org/10.2139/ssrn.649482

Rajdeep Patgiri (Contact Author)

BlackRock, Inc ( email )

Drapers Gardens
12 Throgmorton Avenue
London, EC2N 2DL
United Kingdom
+44 20 7743 1524 (Phone)

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Jose-Miguel Gaspar

ESSEC Business School ( email )

Avenue Bernard Hirsch
Cergy-Pontoise, 95021
France
+33 1 3443 3374 (Phone)
+33 1 3443 3212 (Fax)

HOME PAGE: http://www.essec.edu

Pedro Matos

University of Virginia - Darden School of Business ( email )

University of Virginia
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434 243 8998 (Phone)
434 924 0726 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty-research/directory/pedro-matos/

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Zahid Rehman

BlackRock ( email )

Murray House
1 Royal Mint Court
London, EC3N 4HH
United Kingdom

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