Abstract
The objective of this study is to determine which motives play a significant role in determining the extent of a firm's repurchasing activity. For firms repurchasing through the open market, the motives include taking advantage of perceived undervaluation, increasing financial leverage, distributing cash to shareholders, and reducing agency costs. For firms using a tender offer, the motives include taking advantage of perceived undervaluation and having the ability to significantly increase financial leverage. Also, the hypothesis that the perceived undervaluation motive is stronger for smaller firms is tested. Three censored regression models are employed, and each model's explanatory variables represent commonly cited motives for repurchasing stock.
Repurchasing activity is measured by the amount of cash distributed to shareholders through share repurchases expressed as a percentage of the firm's average market capitalization. The final sample includes 596 open market repurchasing firms, 11 tender offer repurchasing firms, and 991 non-repurchasing firms. The cross-sectional analysis covers the firm's fiscal year ending between March 31, 1996 and April 1, 1997.
There are three primary conclusions of this study. First, perceived undervaluation, financial leverage, excess cash, and agency costs all play important roles in determining the percentage of market capitalization a firm repurchases in the open market. Second, no evidence is found to support the hypothesis that perceived undervaluation and financial leverage impact the percentage of market capitalization a firm repurchases through a tender offer. This is possibly due to the fact that only 11 tender offers were observed during the period studied. The third conclusion is that small firms are more likely to repurchase stock in order to take advantage of perceived undervaluation.
Economics, Finance.
Business Administration, Management.