The cost of financial flexibility: Evidence from share repurchases

Alice A. Bonaimé, Kristine W. Hankins and Bradford Jordan

Journal of Corporate Finance, 2016, vol. 38, issue C, 345-362

Abstract: Over the last two decades, share repurchases have emerged as the dominant payout channel, offering a more flexible means of returning excess cash to investors. However, little is known about the costs associated with payout-related financial flexibility. Using a unique identification strategy, we document a significant cost. We find that actual repurchase investments underperform hypothetical investments that mechanically smooth repurchase dollars through time by approximately two percentage points per year on average. This cost of financial flexibility is correlated with earnings management, managerial entrenchment, and less institutional monitoring.

Keywords: Financial flexibility; Payout policy; Share repurchase; Earnings management; Corporate governance (search for similar items in EconPapers)
JEL-codes: G30 G34 G35 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:38:y:2016:i:c:p:345-362

DOI: 10.1016/j.jcorpfin.2016.02.002

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