Stock Repurchases: Theory and Evidence

Abstract

This article surveys the theoretical and empirical studies on share repurchases. Share repurchases have surpassed cash dividends and become the dominant form of corporate payouts since the last decade. This study provides a brief description of five major types of share repurchases and considers the motives that influence firms’ repurchase decisions. Specifically, we examine regulatory and tax considerations, agency costs of free cash flows, signaling and undervaluation, capital structure, takeover deterrence, and employee stock options. The review indicates that the existing literature provides ample support for several of these motivations while others merit further investigation. Few studies offer possible explanations for the phenomenon of increasing total payouts over time that is largely attributable to share repurchases.