Share Repurchases Research Articles

Taxing share repurchases

The US Inflation Reduction Act of 2022 imposed a 1% excise tax on share repurchases. We can learn from corporate reaction to such a new policy in India. The Indian federal government recently levied a 20 percent tax, plus surcharge, on share repurchases. We show that companies did not slow down their share repurchase initiation. However, to offset the added taxes, they increased their capital investment. The combination of the share repurchase and capital investment decreased their free cash flow. • The Inflation Reduction Act imposed a 1% excise tax on share repurchases. • After enacting a tax on share repurchases, Indian companies did not slow down their initiation. • Companies shifted their activities to avoid an increase in taxes from the repurchase tax. • Indian firm share repurchase and capital investment decreased their free cash flow.

Buyback of Shares in the Indian Scenario

A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. In recent decades, share buybacks have overtaken dividends as a preferred way to return cash to shareholders. The present study attempted to know why the company chosee buyback shares. This study aims at identifying the various methods of buyback shares and analysing the buyback shares in eastern countries. This study also analyzes the buyback scenario of the Indian capital market.

Do adjustment costs influence firms’ target adjustment speeds? International evidence from share repurchase legalization

Do firms change their capital structure adjustment speed towards a target when adjustment costs change? Under a unified capital structure approach that combines the static trade-off and pecking order theories, firms minimize adjustment costs in setting their target adjustment speed. For below-target firms, the availability of share repurchases lowers the expected cost of increasing leverage towards the target. Extending the adjustment cost-based unified framework to the availability of share repurchases, which exogenously lowers the expected cost of leverage increases for below-target firms, I show the availability of share repurchases to result in these firms increasing their leverage adjustment speed towards a target. As predicted, this effect does not hold for the above-target firms.

The determinants of aggressive share buybacks: An empirical examination of U.S. publicly traded restaurant firms

It has become a common practice for restaurant firms to spend amounts exceeding their earnings on share buybacks by depleting their cash reserves or even by borrowing money. Given restaurant firms’ limited ability to generate internal cash and the high cost of debt financing, using these means to finance share buybacks could jeopardize restaurant firms’ long-term success. However, little is known about the factors influencing restaurant firms’ tendency toward this seemingly aggressive buyback behavior. This study revealed that the more restaurant firms’ earnings reduce, the greater their tendency is to conduct such aggressive share buybacks. This result could provide some evidence that managerial self-serving behavior plays a role in aggressive share buybacks in the restaurant industry. The study also demonstrated that the positive impact of reduced earnings on aggressive buybacks becomes stronger as a firm’s degree of franchising increases.

Supply Chain Finance Arrangements and Shareholder Benefits

ABSTRACT Supply chain finance (SCF) is a buyer-led financial innovation used to optimize working capital and increase liquidity within the supply chain. Advertised as win-win, little is known of the benefits to firms or shareholders. I explore whether these arrangements are beneficial to the initiating firm and whether such benefits percolate to the buyer’s investors. I find that although a firm’s days payable outstanding increases post-adoption, SCF arrangements are not beneficial to all firms. Liquidity and profitability decrease post-adoption. I also find that shareholders respond negatively to SCF adoptions, but this response may be attenuated by some firms increasing share repurchases.

Precautionary versus Signalling Motive of Share Repurchases: Evidence from Policy Uncertainty and the COVID‐19 Crisis

AbstractUsing policy‐related uncertainty as a shock to firms’ internal and external financing frictions, we find significantly lower repurchase likelihoods, short‐term market reactions, and post‐announcement completion rates of open market share repurchases during periods of high policy uncertainty. Firms are more likely to switch from a high‐ to a low‐commitment repurchase technique when policy uncertainty is high. In contrast, for firms that are significantly undervalued ex ante, higher policy uncertainty leads to more repurchase activities. In addition, we show that the COVID‐19 crisis is associated with a lower repurchase likelihood for financially constrained firms or those with high cash flow volatility, while undervalued firms repurchased more shares during the pandemic period. Our results are robust after controlling for potential sources of endogeneity and conducting a battery of robustness tests. Collectively, our evidence suggests that the relationship between uncertainty and share repurchases is conditional on institutional contexts. Firms’ level of financial flexibility, their demand for signalling, and the credibility and magnitude of repurchase signals all significantly affect their precautionary and signalling motives.

Strategic repurchases and equity sales: Evidence from equity vesting schedules

This paper studies the strategic use and timing of share repurchases by insiders for personal gain. Using grant-level compensation data and a hand-collected sample of monthly repurchases, I find a positive causal relation between executive equity sales and share repurchases. I identify the relation using the vesting schedule of equity grants as an instrument for equity sales. This behavior is persistent across firm, executive, and governance characteristics. Both CFO and CEO vesting schedules impact repurchases, suggesting the CFO may also have influence over the execution of the repurchase program. There is minimal evidence of long-term value destruction. The results indicate executive contracts impact the execution of share repurchase programs.

Policy Gradient Learning Methods for Stochastic Control with Exit Time and Applications to Share Repurchase Pricing

ABSTRACT We develop policy gradients methods for stochastic control with exit time in a model-free setting. We propose two types of algorithms for learning either directly the optimal policy or by learning alternately the value function (critic) and the optimal control (actor). The use of randomized policies is crucial for overcoming notably the issue related to the exit time in the gradient computation. We demonstrate the effectiveness of our approach by implementing our numerical schemes in the application to the problem of share repurchase pricing. Our results show that the proposed policy gradient methods outperform PDE or other neural networks techniques in a model-based setting. Furthermore, our algorithms are flexible enough to incorporate realistic market conditions like, e.g., price impact or transaction costs.

Temettü Veriminin BIST Hisse Senedi Fiyatlarını Tahmin Gücünün Nedensellik Testleriyle Analizi

Bu çalışmada Campbell ve Shiller (1988a) modelinden hareketle, temettü veriminin BIST hisse senedi fiyatlarını tahmin gücü incelenmektedir. Araştırmada, temettü veriminin hisse senedi fiyatlarını tahmin etmede başarılı bir faktör olup olmadığı test edilecektir. Çalışma, teorisyenler, yatırımcılar ve politika yapıcılar açısından önemli çıkarımlara sahiptir. Öncelikle, kâr payı ödemelerinin firma değerine etkisinin ortaya koyulmuş olması, yöneticiler açısından temettü dağıtım politikalarının oluşturulmasında belirleyici olacaktır. Ayrıca, temettü veriminin tahmin gücünün ortaya koyulması durumunda, yatırımcılar ve portföy yöneticileri, bugünkü değer (present value) yaklaşımını kullanarak belirli bir hisse senedinin yüksek veya düşük değerlenmiş olduğunu tespit edebilirler. Temettü ödemelerinin piyasa dinamiklerine olan etkilerinin bilinmesi, düzenleyici otoritelerin politika kararlarında da yol gösterici olacaktır. Araştırma metodolojisi olarak Toda-Yamamoto (1995) ve Hatemi-J (2012) asimetrik bootstrap nedensellik testleri benimsenmiştir. Araştırmada, Aralık 2011–Kasım 2021 tarihlerinde BIST 100 endeksinde devamlılık gösteren ve kesintisiz olarak temettü ödeyen hisse senetlerine ait temettü verimi ve ay sonu kapanış fiyatı serileri kullanılmıştır. Toda-Yamamoto nedensellik testi bulgularına göre AGHOL, BIMAS, EGEEN, INDES, SARKY, SELEC ve TOASO hisse senetlerinde temettü veriminden hisse senedi fiyatlarına doğru nedensellik ilişkisi tespit edilmiştir. Hatemi-J (2012) asimetrik bootstrap nedensellik testi, Toda-Yamamoto testine nazaran daha az sayıda nedensellik ilişkisine işaret etmektedir. İncelenen çoğu hisse senedinde temettü verimi ve fiyat değişkenlerinin pozitif ya da negatif bileşenleri arasında nedensellik ilişkisi saptanmamıştır. Temettü veriminin tahmin gücüyle ilgili karışık bulgulara ulaşılmasının arka planında, incelenen değişkenlerde yapısal kırılmaların görülmesi, temettü veriminin tahmin gücünün zamanla değişen bir yapıda olması, piyasa şartlarına bağlı olarak tahmin gücünün zayıflaması, temettü verimi ve fiyat arasındaki ilişkinin nonlineer yapıda gerçekleşebilmesi, hisse senedi bazında yapılan sınamaların endeks bazında yapılan sınamalara nazaran dezavantajlı olması, aylık frekanstaki gözlemlerden ziyade yıllık frekanstaki gözlemlerin kullanılması durumunda, temettü veriminin tahmin gücünün daha fazla artış gösteriyor olması, firmaların temettü politikasındaki değişikliklerin ve hisse geri alım kararlarının temettü veriminin tahmin gücünü zayıflatıyor olması sayılabilir.

SHARE REPURCHASES: SEC PROPOSALS AND NEW EXCISE TAX

Share repurchases and insider trading are controversial issues, due to their potential for abuse and oftentimes stunning magnitude. The Securities and Exchange Commission released two proposed regulations in late 2021 and early 2022 addressing these two areas. In addition, the Inflation Reduction Act of 2022 (HR 5376) includes a 1% excise tax on share repurchases beginning in 2023. This article outlines the SEC proposals and comments received, as well as reactions by dissenting Commissioners. Market participants will need to stay abreast of developments in these areas, and monitor whether final rules are issued. Since the share repurchase excise tax has already been signed into law, companies will need to plan to comply with the new tax in 2023 and thereafter.

Accelerated Share Repurchases Under Stochastic Volatility

Accelerated share repurchases (ASRs) are a type of stock buyback wherein the repurchasing firm contracts a financial intermediary to acquire the shares on its behalf. The intermediary purchases the shares from the open market and is compensated by the firm according to the average of the stock price over the repurchasing interval, whose end can be chosen by the intermediary. Hence, the intermediary needs to decide both how to minimize the cost of acquiring the shares, and when to exercise its contract to maximize its payment. Studies of ASRs typically assume a constant volatility, but the longer time horizon of ASRs, on the order of months, indicates that the variation of the volatility should be considered. We analyze the optimal strategy of the intermediary within the continuous-time framework of the Heston model for the evolution of the stock price and volatility, which is described by a free-boundary problem which we derive here. To solve this system numerically, we make use of deep learning. Through simulations, we find that the intermediary can acquire shares at lower cost and lower risk if it takes into account the stochasticity of the volatility.

Corporate payout, cash holdings, and the COVID-19 crisis: Evidence from the G-7 countries

This paper examines the impact of the COVID-19 pandemic on the adjustments of dividends and share repurchases of publicly listed firms in the G-7 countries. Firms in the United Kingdom, Germany, France, and Italy experienced a widespread cut in dividends, while firms in the United States and Canada cut cash payout more via share repurchases, with Japanese firms in between. Corporate cash holdings helped mitigate the negative impact of COVID on payout adjustments, but the impact was less significant for European firms.

REAKSI PASAR ATAS PENGUMUMAN BUYBACK SAHAM PADA SAAT PANDEMI COVID-19 DI BURSA EFEK INDONESIA

This study aims to determine whether the market reaction to the announcement of share buybacks has a positive effect during the covid-19 pandemic. The population of this research is 68 companies. The sampling technique used purposive sampling method, the samples obtained were 60 companies. The proxy in measuring market reaction uses cumulative abnormal return (CAR). The data analysis technique used is descriptive analysis, one sample t-test. The market reacted negatively at the time of the announcement of the stock buyback, before the event and after the event. This situation is different from normal conditions if investors receive good information then the market will react positively. The Covid-19 outbreak has made market conditions uncertain, resulting in a decline in IHSG. Information on share buyback announcements and capital information issued by companies to conduct share buybacks is good information or positive information, but the information has little effect compared to the impact of covid-19 and has not been able to give confidence to investors.

Litigation Risk Management Through Corporate Payout Policy

AbstractFirms modify their payout policy in anticipation of future litigation costs. We examine a comprehensive sample of U.S. corporate lawsuits and find that firms facing significant litigation risk pay lower dividends, and in some cases omit dividends while distributing more cash through share repurchases. Litigation risk changes the distribution of payouts but not the total payout yield as the increase in share repurchases offsets the decrease in dividends. Cash-poor firms cut share repurchases when settlement costs are incurred. The results suggest that firms at a higher risk of litigation increase their payout flexibility.

Asset Monetisation: A Step Towards Liberalisation and Privatisation–Strategic Issues

Privatisation, a buzzword of the 20th century, has varied approaches; it could be a broad approach of liberalisation to introduce market forces without any change of ownership, termed as ‘partial privatisation’. In narrow terms, it refers to denationalisation or divestiture and change of ownership by sale to private individuals. Public sector in India has grown over the years and operational autonomy has been granted. Disinvestment of government shareholding, has been an annual budgetary exercise; it includes strategic sale. Of late, various disinvestment approaches that are followed include share buyback, cross shareholding offer for sale, follow-on public offer, block deal exchange trade fund. The realisation of disinvestment has been about 56% of the total, and new options have to be explored. Asset monetisation, an approach to encash assets with an objective to raise resources to finance new projects, is planned with an objective to develop infrastructure by involving private sector by following different forms of the publicÐprivate partnership approach. National Monetisation Policy (NMP) has been announced by the government of India to raise ₹600,000 crore over the period of next four years, that is, from 2022 to 25, to cover up the infrastructure gap. As such, monetisation of assetsÑcore as well as non-coreÑwould be a great step in achieving the objective of Atmanirbhar Bharat [self-reliant India], and India to become $5 trillion economy by 2024. Privatisation, liberalisation and asset monetisation appear to be a simple theoretical exercise; it would require planning for newer approaches to attract private funds and also to have political will.

DO STOCK BUYBACKS SUPPRESS CORPORATE INNOVATION?

In 2021, the United States (U.S.) publicly traded firms repurchased nearly $850 billion of their own shares, setting an all-time record. Given the enormous scale of this resource allocation away from investment in innovation and growth and toward shareholders, it is reasonable to consider if these buybacks create opportunity costs. Stock buybacks increase earnings per share, even in the wake of no earnings growth, driving up share price and benefitting the top executives who make these capital allocation decisions by increasing the value of their stock options. Pundits disagree on the impact that high levels of buybacks have on the economy, some arguing that stock buybacks come at the expense of strategic investment in innovation while others point to diminishing returns to research and development (RnD) investment as the reason for decreases in innovative activity. This paper empirically tests whether share buybacks are suppressing corporate innovation in ways that control for widely observed declines in returns to R&D investment, and the endogenous relationship between stock buybacks and innovation. Statistical analysis provides strong evidence that share buybacks are suppressing corporate innovation. This has enormous ramifications to the long-term viability of U.S. industries and to social justice.

Narcissistic CEOs Promise More than they Deliver: A Case from Share Repurchases

Narcissistic CEOs Promise More than they Deliver: A Case from Share Repurchases

Do Executives Use Their Corporate Jets to Go Provide Private Information to Investors?

In this study, we use data on the flight paths of corporate jets to assess the likelihood that executives are engaging in private meetings to provide market-sensitive information to large investors ahead of key events, such as announcements of a share buy-back or earnings surprises. We find that shortly before making such market announcements, executives are indeed more likely to fly to places where their investors are located. Moreover, we find that investors seem to act on information provided to them: following the meetings, they tend to increase their shareholdings, in comparison to investors that have not been visited. Through these findings, we advance the literature that takes a socio-political perspective on corporate governance, including the relations between senior executives and company investors. We also contribute to the literature on corporate misconduct.

KEBIJAKAN DIVIDEN DALAM PERSPEKTIF CATERING THEORY

This research is aimed to investigate the role of dividend premium and share repurchases in influencing the companies’ dividend policy. The theory used in this research is catering theory. This research uses secondary data obtained by using observation method. The data source in this research is the annual reports of manufactur companies listed on the Indonesia Stock Exchange (IDX) for the period 2017 to 2019. The sample were selected using purposive sampling method, with a total of 98 companies. This research uses analysis double linear regression test using SPSS version 20 software. The result of this research indicate that dividend premium has a positive and significant effect on dividend policy. Share repurchases has a negative and significant effect on dividend policy

Dividend reduction and stock price reaction in Indian market: is there a role of share repurchase?

PurposeThis paper aims to analyze the stock price reaction because of dividend reduction (DR) announcements in the Indian equity market, controlling for share repurchases.Design/methodology/approachThe sample comprises National Stock Exchange (NSE) 500 companies listed in the NSE Ltd. covering a time span from year 2009 to 2019. Using the event study methodology, the authors measure the impact of DR announcements on security prices around the event day. The authors also examine the price response to DRs at the interim stage versus the final stage and identify the factors that drive the decision to reduce dividends at the interim level versus final level.FindingsThe authors find that overall DR announcements negatively impact abnormal returns. Firms that experience stronger adverse price reaction following DR announcements resort to share repurchase in the same year to boost stock prices. The authors find that interim DRs create more negative price reactions than final DRs. Finally, firms experiencing lower levels of prior year earnings, firms with smaller sizes and overvalued firms tend to reduce dividends at the interim level instead of postponing the reduction to the final level.Originality/valueThis paper examines stock price reaction because of DR announcements of Indian firms. The sample comprises firms that reduce dividends with contemporaneous share repurchases as well as firms that reduce dividends without contemporaneous repurchase activity. To the best of the authors’ knowledge, studies on substitution effect of dividends with buyback in the context of Indian equity market are rare. Further, investigating the difference in stock price movement because of DRs at the interim level versus the final level is the unique contribution of this paper.