THE DETERMINANTS of INITIAL STOCK REPURCHASES

Luís Pacheco () and Clara Raposo ()

No 5, Working Papers de Gestão (Management Working Papers) from Católica Porto Business School, Universidade Católica Portuguesa

Abstract: We present univariate and multivariate evidence to show that firms which engage in initial stock repurchases have some specific economic and financial attributes when compared to size-and industry-matched firms. We find that initial repurchase firms are younger, have lower leverage and operating risk, and higher payouts, operating cash flows, profitability and market-to-book than matched non-repurchase firms. Compared to secondary or “seasoned” repurchase matched firms, these initial repurchase firms are also younger and have higher cash, profitability, sales growth and market-to-book, as well as lower payouts, leverage and retained earnings. Therefore, we analyze the determinants and motivations that may explain why firms repurchase their own stock for the first time by studying the theoretical hypotheses found in the financial literature that are most important in explaining initial stock repurchases. The results support the free cash flow and risk reduction signaling hypotheses and the flexibility motivation for conducting stock repurchases. We do not find strong support for any other theoretical explanations of stock repurchases, such as undervaluation signaling, timing, tax effects and options and dilution hypotheses.

Keywords: Stock Repurchases, Initial Stock Repurchases; Payout Policy, Theoretical Hypotheses. (search for similar items in EconPapers)
JEL-codes: G32 G35 (search for similar items in EconPapers)
Pages: 84 pages
Date: 2009-02
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:cap:mpaper:052009

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