Managerial motivation and timing of open market share repurchases

Rev Quant Finan Acc (2010) 34:517531

DOI 10.1007/s11156-009-0145-8

ORIGINAL RESEARCH

Zahn Bozanic

Published online: 16 September 2009 Springer Science+Business Media, LLC 2009

Abstract There are two major mechanisms by which managers distribute cash to shareholders: through dividends and share repurchases. Historically, dividends have been the preferred method, but in recent years, share repurchases have become more popular, with more rms using repurchases than dividends to distribute cash. During the sample period of 20042006, 6.5 billion shares were repurchased for a total dollar volume amount of $222 billion. Using a unique dataset on actual monthly share repurchases, this paper investigates when and why managers repurchase shares in the open market. The paper nds evidence that rms which make repurchases are jointly timing their repurchases to perceived undervaluation and the presence of discretionary cash ow. In addition, the paper nds evidence which supports that (1) rms in competitive industries tend to repurchase less, (2) rms tend to substitute repurchases for anti-takeover provision adoption, and (3) rms attempt to manage earnings upward through the use of repurchases.

Keywords Share repurchases Market timing Anti-takeover provisions

Earnings management Herndahl index

JEL Classication G34 G35 M41

1 Introduction

There are two major mechanisms by which rms distribute cash to shareholders: through dividends and share repurchases. Historically, dividends have been the preferred method, but in recent years, share repurchases have become more popular, with more rms using repurchases than dividends to distribute cash.1 During the sample period of 20042006,

1 Due to the SECs safe harbor provisions adopted in 1982 (Rule 10b-18) rms are relatively immune from allegations of market manipulation so long as repurchases are carried out under the SECs guidelines.

Z. Bozanic (&)

Department of Accounting, The Smeal College of Business, The Pennsylvania State University, University Park, PA 16802, USAe-mail: [email protected]

Managerial motivation and timing of open market share repurchases

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6.5 billion shares were repurchased for a total dollar volume amount of $222 billion. A major question that has plagued researchers has been whether managers time the market when making share repurchasesthat is, do managers decide to repurchase shares when they perceive their stock price to be low? Or, do managers use repurchases to lower free cash ow, possibly in order to reduce agency problems related...