Are Open Market Share Repurchase Programs Really Flexible?

Abstract

I use the recent financial crisis and utilize the predetermined variations in stock repurchase program ending dates to show that open market share repurchase programs are not as flexible as one might expect. My difference-in-difference estimator shows that once firms have announced such programs, they sacrifice real activities to finish them. Specifically, firms with open market share repurchase programs ending after December 2007 cut 1.9 percentage points more of capital investment, four employees more per million dollars of capital stock, and 9 percentage points more of R&D expense to fund the share repurchases than otherwise similar firms with programs ending before December 2007. The reductions represent a 7%-15% decrease of pre-crisis levels. The freed-up capital indeed goes toward the share repurchase programs: firms buyback on average 84% of the predetermined amount of the shares.