Controlling shareholders’ opportunistic use of share repurchases

This study examines how share repurchase and dividend policies are influenced by controlling shareholders in an emerging market. We maintain that the controlling shareholders can utilize share repurchase opportunistically, particularly when they exercise voting rights in excess of cash-flow rights. The evidence of Korean firms suggests that the wedge between the voting rights and cash-flow rights positively affects share repurchases but negatively affects cash dividends. We also find that share repurchases are not always supported by operating performances. The results indicate that firms may utilize share repurchases as a means to pursue private benefits of the controlling shareholders. We also document that share repurchases do not substitute for cash dividends, suggesting that share repurchases are not genuine distributions. Furthermore, we find that the wedge of share repurchases reduces firm value. Overall, our results indicate that the controlling shareholders of Korean firms use share repurchases opportunistically rather than strategically.     

Ownership structure and tax-friendly dividends

The paper examines the existence of tax-based dividend clienteles using the novel environment of Australia, which has operated a full dividend imputation system since 1987. The analysis jointly focuses on the tax-based preferences of five categories of shareholders, including both domestic and foreign-domiciled shareholder classes. Incorporating the dividend franking percentage as a direct measure of the degree of tax benefit associated with dividends, strong evidence supporting the existence of tax-based dividend clienteles is present for both domestic and foreign shareholder categories. This includes domestic corporate blockholders and company directors, and local institutional investors following tax reforms in 2000, and foreign institutional shareholders which, alternatively, demand lower dividends and dividend franking. These findings persist after considering the effect of share repurchases, and under various model specifications controlling for unobserved firm heterogeneity and potential endogeneity between ownership structure and dividend payout policy.     

Financial expert CEOs: CEO׳s work experience and firm׳s financial policies

We study CEOs with a career background in finance. Firms with financial expert CEOs hold less cash, more debt, and engage in more share repurchases. Financial expert CEOs are more financially sophisticated: they are less likely to use one companywide discount rate instead of a project-specific one, they manage financial policies more actively, and their firm investments are less sensitive to cash flows. Financial expert CEOs are able to raise external funds even when credit conditions are tight, and they were more responsive to the dividend and capital gains tax cuts in 2003. Analyzing CEO-firm matching based on financial experience, we find that financial expert CEOs tend to be hired by more mature firms. Our results are consistent with employment histories of CEOs being relevant for corporate policies. However, we cannot formally rule out that our findings are partly explained by endogenous CEO-firm matching.     

Share repurchases,catering, and dividend substitution

We first extend Baker and Wurgler's (2004a) catering theory of dividends to share repurchases. Consistent with the notion that firms cater to investor demand for share repurchases, we report evidence that the market's time-varying repurchase premium positively affects firms' choice to repurchase shares. Next, we use the catering behavior as a novel framework for testing the dividend substitution hypothesis. Consistent with the notion that managers consider dividends and share repurchases to be substitute payout mechanisms, we find that the dividend premium negatively affects the repurchase choice, whereas the repurchase premium negatively affects the choice to pay dividends.     

Executive incentives and payout policy: Empirical evidence from Europe

We investigate how corporate payout policy is influenced by executive incentives, i.e. stock and option holdings, stock option deltas and stock-based pay-performance sensitivity for 1,650 publicly listed firms from the UK, Germany, France, Italy, the Netherlands and Spain, over the period from 2002 to 2009. Our results show that executive stock option holdings and stock option deltas are associated with lower dividend payments in our sample of European countries, where we do not observe any presence of dividend protection for executive stock options. We find that this relationship is mainly driven by exercisable stock options and by options that are in the money. Additionally, we observe that executive stock option holdings and stock option deltas have a negative impact on total payout, suggesting that executives do not substitute share repurchases for dividends. Furthermore, the fraction of share repurchases in total payout increases as executive stock option holdings and stock option deltas increase. Finally, our results show that executive share ownership and stock-based pay-performance sensitivity may mitigate agency conflicts by significantly increasing the level of total payout.     

Does geography matter? Firm location and corporate payout policy

We investigate the impact of geography on agency costs and firm dividend policies. We argue that remote firm location increases the cost of shareholder oversight of managerial investment decisions. We hypothesize that remotely located firms facing free cash flow problems precommit to higher dividends to mitigate agency conflicts. We find that remotely located firms pay higher dividends. As expected, the effect of geography on dividends is most pronounced for firms with severe free cash flow problems. Further, remotely located firms rely more on regular dividends instead of special dividends or share repurchases and decrease dividends less often.     

Dividends and share repurchases during the COVID-19 economic crisis

In this article, we examine dividends and share repurchases of S&P 1500 firms during the COVID-19 crisis characterized by the stock market crash and a relatively quick stock price recovery propelled by technology stocks. We find that the great majority of firms either maintain or increase the level of dividends during the crisis period. Yet, the relation between the dividend payout and reported earnings is negative and significant. This relation also holds for other types of payouts, including share repurchases and special dividends. Moreover, we find that both forecasted and realized earnings of up to 1 year into the future are negatively associated with current dividends, implying that existing payout policies are unsustainable in the longer term. Surprisingly, the difference-in-differences test shows that firms strongly affected by the COVID-19 crisis have higher dividend payouts (relative to net earnings) compared to unaffected firms. The same test indicates that strongly affected firms significantly reduce repurchases.     

Payout policy in the 21st century

We survey 384 financial executives and conduct in-depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions. Our findings indicate that maintaining the dividend level is on par with investment decisions, while repurchases are made out of the residual cash flow after investment spending. Perceived stability of future earnings still affects dividend policy as in Lintner (1956. American Economic Review 46, 97–113). However, 50 years later, we find that the link between dividends and earnings has weakened. Many managers now favor repurchases because they are viewed as being more flexible than dividends and can be used in an attempt to time the equity market or to increase earnings per share. Executives believe that institutions are indifferent between dividends and repurchases and that payout policies have little impact on their investor clientele. In general, management views provide little support for agency, signaling, and clientele hypotheses of payout policy. Tax considerations play a secondary role.     

Management compensation contracts and distribution policies in the US technology sector

This paper examines the impact of executive compensation practices on (a) the decision to distribute and (b) the distribution channel employed by companies from the US technology sector. We report that firms that compensate their managers using executive stock options (ESOs) tend to distribute less and firms that use stock awards make more distributions. When we simultaneously examine the distribution and the channel used, we find firms using ESOs restrict their dividend payments but their propensity for stock repurchases is unaffected. Firms using stock awards to compensate managers make greater distributions across all channels. We also provide strong evidence in favour of the agency and leverage explanations for distributions.     

Firms as buyers of last resort

We develop a model to explore the asset pricing implications of firms being buyers of last resort for their own stocks. Those with more ability to repurchase shares when prices drop far below fundamental value (i.e., less financially constrained firms) should have lower short-horizon return variances (controlling for fundamental variance) than other firms. Using standard proxies for financing constraints such as past repurchases and firm age, we find strong support for this predicted relation. We also find that this relation is stronger in the U.S. after 1982 when regulatory reforms lowered the legal cost of conducting repurchases as well as in countries where share repurchases are legally easier to execute.     

Payout flexibility and capital expenditure

Over the past two decades or so, repurchases have become an appealing method for disbursing cash to shareholders compared to the traditional dividends. Managerial perception as well as empirical evidence suggests that repurchases are inherently more flexible than dividends, which may account for their increasing popularity. The rigidity of dividends and the apparent flexibility of share repurchases could impact firm investments. Firms may forego profitable investment opportunities to maintain their dividend levels, while repurchases could be easily scaled back to fund profitable investment projects without fear of an adverse market reaction. We test the flexibility hypothesis of repurchases by regressing capital expenditures on repurchases and dividends in addition to other control variables. Consistent with our hypotheses, we find an inverse relationship between capital expenditures and repurchases but an insignificant relationship with dividends. Further, we find that the flexibility associated with repurchases is especially evident for firms that are financially constrained, and during the recent financial crisis period when external capital constraints were severe. Finally, we find that flexibility of repurchases with respect to capital expenditures is stronger in the more recent time period during which regulatory changes made repurchases more attractive as a mechanism to disburse cash back to shareholders.     

Patterns in payout policy and payout channel choice

We study the decision to distribute funds as well as the choice of the payout channel (i.e. dividends, repurchases, or both). Our analysis of the payout policy of UK firms demonstrates that the importance of share repurchases is increasing, but dividends still constitute a vast proportion of the total payout. We document that there is a relation between the presence of blockholders and the choice of the payout channel. We find that payout decisions are influenced by directors’ liquidity needs but are not consistent with the agency theory of payout. We also reject the tax-clientele explanation for payout choices.     

Dividend payout and executive compensation: theory and evidence from New Zealand

Using a model based on Bhattacharyya (2007), we predict a positive (negative) relationship between the earnings retention ratio (dividend payout ratio) and managerial compensation. We use tobit regression to analyse data for New Zealand firms' dividend payouts over the period 1997–2015 and find results consistent with Bhattacharyya (2007). These results hold when the definition of payout is modified to incorporate both common dividends and common share repurchases. Our results indicate that corporate dividend policy among New Zealand firms is perhaps best understood by considering the dividend payout ratio, rather than the level of, or changes in, cash dividends alone.     

The Role of Investment,Financing and Dividend Decisions in Explaining Corporate Ownership Structure: Empirical Evidence from Spain

This paper analyses the determinants of ownership structure by focusing on the role played by investment, financing and dividend decisions. The use of the Generalised Method of Moments allows us to provide new evidence on this important corporate governance topic, since it controls for the endogeneity problem. Our most relevant findings show that: i) increases in debt lead insiders to limit the risk they bear by reducing their holdings; ii) monitoring by large outside owners substitutes for the disciplinary role of debt; and iii) both inside and outside owners are encouraged to increase their stakes in the firm in view of higher dividends. Our results hold after controlling for equity issues and share repurchases.     

Cash holdings and share repurchases: International evidence

In this study, we examine the patterns and determinants of share repurchases using firm-level data from seven major countries—Australia, Canada, France, Germany, Japan, the U.K., and the U.S.—over the period 1998–2006. We find that while non-U.S. firms do not repurchase shares as much as U.S. firms do, both U.S. and non-U.S. firms display a common set of share repurchase behaviors. For example, across countries, firms use share repurchases as a flexible means of distributing cash. More importantly, large cash holdings are significantly associated with the amount of share repurchases in all countries. There is evidence that large cash holdings held by repurchasing firms represent excess cash. Firms tend to experience substantial increases in cash holdings prior to share repurchase as a result of reductions in capital expenditures. Overall, our evidence lends support to two hypotheses: (i) firms discharge excess capital to reduce agency conflicts and (ii) firms use repurchases to distribute temporary cash flows.     

Voluntary disclosures around share repurchases

Managers increase the frequency and magnitude of bad news announcements during the 1-month period prior to repurchasing shares. To a lesser extent, they also increase the frequency and magnitude of good news announcements during the 1-month period following their repurchases. These results are consistent with Barclay and Smith's [1988. Corporate payout policy: Cash dividends versus open-market repurchases. Journal of Financial Economics 22, 61–82.] conjecture that share repurchases, unlike dividends, create incentives for managers to manipulate information flows. We further show that managers provide downward-biased earnings forecasts before repurchases and that managers’ propensity to alter information flows prior to share repurchases increases with their ownership interest in the firm.     

Stock repurchases and treasury share sales: Do they stabilize price and enhance liquidity?

Can companies reduce the volatility and increase the liquidity of their stocks by trading them? In the context of the Italian stock market, where companies have far more leeway to sell as well as buy their own stocks than in the U.S., the answer is yes. We examine the effects of trading (open-market share repurchases and treasury shares sales) on liquidity (bid-ask spread) and volatility (return variance). Further, we examine the impact of shareholder approvals of repurchase programs on liquidity and volatility. We find clear evidence that trading increases liquidity and reduces volatility. These results are consistent with our analysis of the motives Italian companies give for making share repurchases.     

Social capital and payout policies

In this paper, we investigate the relationship between regional social capital and corporate payout policies. Using a large sample of US data, we find a positive relationship between regional social capital and both the likelihood and the amount of cash dividend payouts. However, we find that social capital has no bearing on the likelihood and amount of stock repurchases. The results from additional analyses show that the relationship between social capital and dividends is more pronounced for less geographically dispersed firms. We also find that the network component of social capital has a greater effect on dividends than the social norm component. Our results are robust to alternative specifications of dividends and social capital and to the use of a two-stage least squares (2SLS) analysis to alleviate endogeneity concerns. Overall, we document that regional social capital plays an important role in influencing cash dividend payout policies.     

Buyback behavior of initial public offering firms

We examine the motives behind the share repurchase decisions of initial public offering (IPO) firms by studying the stock and operating performance after the IPO date. We find that IPO firms that announce repurchases within 3 years of IPO dates exhibit poorer long-run abnormal operating performance than other IPO firms. These IPO firms also experience poorer stock return performance and downward analyst forecast revisions. Moreover, these firms show intensive insider selling transactions after the IPO date. These results for IPO announcing repurchase firms are consistent with the misleading hypothesis, which suggests that these IPO firms mislead investors by announcing repurchases as false signals.