Abstract
Research background: Payout policy has attracted a great deal of research, how-ever it still has not been satisfactorily explained why corporations repurchase their shares. The most popular explanation for share repurchases is their signaling power. An alternative explanation for share repurchases is related to free cash flow. We assume that both theories are not competitive, due to the fact that the motives for share repurchases may differ depending on the firm?s life cycle stage.Purpose of the article: The aim of the paper is to test the hypotheses that companies in growth stage are more prone to repurchase their shares due to the their undervaluation.Methods: Our analysis focuses on 116 repurchase on WSE and 47 repurchase on NewCon-nect in Poland during the period 2004?2016 to test the hypothesis. We assume that companies listed on WSE are in their mature stage while listed on NewConnect are in the growth stage. We use market value to book the value ratio (M/BV) and the relation of M/BV ratio for the repurchasing company to the M/BV ratio for the whole market at the date of implementing share repurchase program as a proxies for firm valuation.Findings & Value added: Our study does not confirm that repurchased companies at a growth stage are more undervalued than repurchased companies at a mature stage (at statistically significant level), however there are more repurchased companies at a growth stage with lower M/BV value than repurchase companies in mature stage. Adding corporate life cycle theory into the study, our result can contribute to the literature by more distinctly understanding the motivation of share repurchases. The results might be helpful for companies to determine their financial policies and for investors to determine their investment decisions.
Highlights
Dividend policy has attracted a great deal of research, it is still not satisfactorily explained why corporations distribute dividends, or why firms repurchase their shares
We examine the undervaluation hypotheses by comparing the value of companies repurchasing their shares at the growth stage, versus the companies repurchasing their shares at the mature stage
Our research sample consisted of 116 firms which repurchased their shares out of those listed on main market Warsaw Stock Exchange market (WSE) at the end of 2016 and 47 out of those listed on NewConnect at the end of 2016
Summary
Dividend policy has attracted a great deal of research, it is still not satisfactorily explained why corporations distribute dividends, or why firms repurchase their shares. The most popular explanation for share repurchases is their signaling power, which means firms repurchase their shares to signal the belief that the shares are undervalued (Dann, 1981; Vermaelen, 1981; Asquith & Mullins, 1986; Ikenberry et al, 1995; Stephens & Weisbach, 1998). An alternative explanation for share repurchases is related to free cash flow. Free cash flow gives rise to conflicts between shareholders and managers when the latter have incentives to invest in projects beyond those with positive net present value (Jensen, 1986). By returning free cash flow to shareholders, repurchases mitigate these conflicts
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