Determinants of Repurchase Size: Evidence from the UK

Abstract

The paper focuses on the factors that determine the size of an open market share repurchase in the UK. The testing covers the time period 1985–2014 and tests if the traditional motives for repurchasing shares also determine the size of the repurchase. The testing also checks if the influences of these determinants are non-linear, U-shaped or inverted U-shaped, which, to the best of our knowledge, is also a novel empirical approach. The consideration of non-linear influences on repurchase size is relevant due to the overlapping of repurchase determinants. For instance, if the distribution of excess cash is the motive for undertaking the repurchase and not replacing dividend distribution, then the influence of dividend distribution on repurchase size may conflict with the traditional expectation of repurchases being used as dividend replacements. The testing finds that the motive of using repurchases for signalling stock undervaluation has the most consistent influence on repurchase size, followed by the motives of adjusting the reported EPS when earnings are negative and for distributing surplus cash. The motive for using repurchases to adjust the capital structure to increase the debt exposure has a U-shaped influence on repurchase size, while board independence has an inverted U-shaped influence. Overall, when compared to the current literature, this paper is able to demonstrate that there is a strong consistency between the motives that lead to repurchases in the UK, and the determinants of repurchase size.