Abstract
Share repurchases have become persistent. Firms use cash flow as the primary source of capital to finance repeated share repurchases. This internal financing increases (decreases) retained earnings (paid-in-capital) in the capital structure and weakens the sensitivity of investment to cash flow. Our findings suggest that traditional explanations for share repurchases—to distribute temporary cash flows, signal undervaluation, or increase the leverage ratio—have lost power, and that share repurchases have become associated with a firm’s financial maturity as captured by retained earnings-to-assets, with mature firms displaying a long-term increase (decrease) in the sensitivity of share repurchases (investment) to cash flows.
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