The impact of share repurchases on equity finance and performance

Abstract

Although both share repurchases and equity issuance can help to reduce information asymmetry, only a few prior studies discuss how the information content of share repurchases affects firms’ subsequent decision in terms of equity issuance. We find that share repurchases are negatively related to subsequent equity issuance, which is consistent with the notion that undervalued firms are less likely to issue equity, while firms issuing equity are overvalued. We also examine whether this association differs according to the likely sources of the repurchase funds. We find that the association is more negative for firms that have high sales growth and, therefore, generate more internal cash flow. By contrast, we find that the association is less negative for firms that increase their debt financing. In addition, we document more positive operating and stock market performance on the part of firms that repurchase shares, especially firms that repurchase and then issue equity.