Share Repurchases

Share repurchases have reached record values – almost $1 trillion in 2018 – and surpassed dividends to become firms’ preferred payout method. Understanding their causes and consequences is thus more important than ever. We survey the share repurchase literature with an emphasis on the last decade. Traditional repurchase motives such as dividend substitution, agency costs, signaling, and taxes generally remain true but are complex. For instance, firms do not directly substitute repurchases for dividends; often these payouts complement one another. In fact, it is repurchases’ distinctions from dividends – namely, their perceived flexibility relative to sticky dividends – that has likely made them so popular. Another reason some firms repurchase is to reduce agency costs associated with excess cash. Managers, however, also use repurchases to meet short-term earnings and compensation goals. These repurchases do not solve agency problems but are their symptom. Repurchases in the 2000s are weaker undervaluation signals than in the 1980s and 1990s. Although stock prices still tend to jump at the announcement of repurchases, they no longer consistently rise in the long-term. Further, the firms that buy back the most (large firms) do not advantageously time repurchases. Shareholder tax preferences affect payouts, and payout influences which investors are drawn to the firm. Corporate taxes, specifically repatriation taxes, also significantly impact repurchases. New repurchase motives have emerged too: Payout policy is closely intertwined with other firm characteristics and policies including liquidity, investment decisions, hedging policy, product market competition, and labor contracts. Though recent studies have significantly enriched our understanding of repurchases, many interesting questions remain for future research.