Can Buybacks Be a Product of Shorter Shareholder Horizons?

38 Pages Posted: 8 Apr 2005

See all articles by Jose-Miguel Gaspar

Jose-Miguel Gaspar

ESSEC Business School

Massimo Massa

INSEAD - Finance

Pedro Matos

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

Rajdeep Patgiri

BlackRock, Inc

Zahid Rehman


Multiple version iconThere are 2 versions of this paper

Date Written: December 2004


We examine how shareholder investment horizons influence firms' payout decisions. We find that US 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.

Keywords: Payout policy, repurchases, institutional investors, investment horizon, short-termism, shareholder heterogeneity, investor catering

JEL Classification: G32, G35

Suggested Citation

Gaspar, Jose-Miguel and Massa, Massimo and Matos, Pedro and Patgiri, Rajdeep and Rehman, Zahid, Can Buybacks Be a Product of Shorter Shareholder Horizons? (December 2004). CEPR Discussion Paper No. 4813. Available at SSRN:

Jose-Miguel Gaspar (Contact Author)

ESSEC Business School ( email )

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Massimo Massa

INSEAD - Finance ( email )

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Pedro Matos

University of Virginia - Darden School of Business ( email )

University of Virginia
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European Corporate Governance Institute (ECGI) ( email )

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Rajdeep Patgiri

BlackRock, Inc ( email )

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London, EC2N 2DL
United Kingdom
+44 20 7743 1524 (Phone)

Zahid Rehman

BlackRock ( email )

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

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