How Do Stock Repurchased Affect Bank Holding Company Performance?

47 Pages Posted: 9 Aug 2006

See all articles by Beverly Hirtle

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department

Date Written: April 2001

Abstract

Using data from bank holding company regulatory reports, we examine the relationshipbetween stock repurchases and financial performance for a large sample of bank holding companies over the years 1987 to 1998. The primary result is that higher levels of repurchases in one year are associated with higher profitability and a lower share of problem loans in the subsequent year. This finding is robust to several different ways of measuring share repurchase activity. Our results appear to be driven primarily by bank holding companies with publicly traded stock, especially those companies whose stock is traded on major exchanges.

The finding that higher repurchases are followed by better financial performance is consistent with at least two distinct behavioral hypotheses. First, bank holding company managers may opt to return excess funds to shareholders when they have limited outside investment opportunities. Alternatively, managers may choose to increase repurchases when they have private information suggesting that the future profitability of the bank is likely to be strong. We find evidence suggesting that the repurchase-performance link may be driven by different factors for different types of bank holding companies. In particular, the evidence is consistent with the first hypothesis for banks traded on major stock exchanges, but only weakly supports this explanation for smaller, closely held companies.

Keywords: bank capital, stock repurchases, free cash flow, bank performance, bank holding company

JEL Classification: G21, G35, G34

Suggested Citation

Hirtle, Beverly, How Do Stock Repurchased Affect Bank Holding Company Performance? (April 2001). FRB of New York Staff Report No. 123. Available at SSRN: https://ssrn.com/abstract=923382 or http://dx.doi.org/10.2139/ssrn.923382

Beverly Hirtle (Contact Author)

Federal Reserve Bank of New York - Banking Studies Department ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7544 (Phone)
212-720-8363 (Fax)

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