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An empirical survey of the motivation for share repurchases in the UK

Rob Dixon · Bob Stradling · Anne D. Woodhead

32 citations0/0 files storedManagerial Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

Purpose Most research on share repurchases is based on the USA. Recently, the rate of share repurchases by UK companies has increased significantly; such a marked increase in activity would suggest a change in strategic factors generating this activity. This paper aims to focus on UK practice, the motivations of UK companies to repurchase shares and compares similar research in the USA. Design/methodology/approach Strategic motives for share repurchase activity are examined by a questionnaire survey of the finance directors of the top UK 200 companies. The outcome is compared to equivalent US research. The theoretical underpinning of the survey is based on six prominent hypotheses from the academic literature. Findings The results indicate that a primary motive of share repurchases in the UK is to achieve an optimal capital structure, and that the requirement to cancel shares is fundamental to buy‐back decisions in the UK. Research limitations/implications USA/UK comparison has limitations, nevertheless it highlights differences and possible reasons. A follow‐up study in the current market conditions may give further clarity. Also, a survey of smaller quoted companies may further enhance our understanding of the motives. Practical implications The likelihood is of this trend being maintained, especially in view of legal development. Originality/value Individual respondents indicated that finance directors have a genuine interest in this topic and that further research would be beneficial in both practical and academic use. Share buy‐backs can be an effective part of the overall strategy of a company, however the effects of a repurchase are ultimately short term.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1996Agency costs of free cash flow, corporate finance, and takeovers 1977The Determination of Financial Structure: The Incentive-Signalling Approach 1981Common stock repurchases and market signalling 1983Horizontal mergers, collusion, and stockholder wealth 1981Common stock repurchases 1981Intra-industry information transfers associated with earnings releases 2002When a buyback isn’t a buyback: open market repurchases and employee options

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2018Corporate governance and company performance: Exploring the challenging issues 2019Failure of play on asset disposals and share buybacks: Application of game theory in the international hotel market 2022Firm performance following actual share repurchases: Effects of investment crowding out and financial flexibility 2011Is the market underreacting or overreacting to open market share repurchases? A UK perspective 2013Share Repurchases, Signalling Effect and Implications for Corporate Governance: Evidence from India

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