Share Repurchases and Acquisitions: An Analysis of Which Firms Participate
John B. Shoven, Laurie Blair Simon
NBER Working Paper No. 2243
Firms can transmit cash to shareholders either by paying dividends or by purchasing shares. The share purchases can be either the firm's own securities or those of another firm. Recent evidence suggests that there has been a dramatic increase in the use of these nondividend payments to shareholders. This paper reviews the theories which have been offered regarding the motivation of nondividend payments. These include taxation advantages, adjustment towards optimal debt-equity ratios, anti-takeover strategies, free cash flow (agency) considerations, signaling, and habit formation or learning. From these theories, we derive and investigate econometrically potential characteristics which predict participation in the above actions for roughly 2.000 firms in 1976 and 1984. We find the variables suggested by the various hypotheses collectively have substantial power in predicting participation in share repurchase and acquisitions. The free cash flow and habit forming arguments prove most consistent with our findings. Tests for structural change across time confirm an intercept shift consistent with dramatic increases in these activities, and fail to reject that the characteristic determinants of these actions are unchanged.
Published: Auerbach, Alan J. (ed.) Corporate Takeovers: Causes and Consequences. Chicago: University of Chicago Press, 1988.