The decision to repurchase shares: A cash flow story

Abstract

Utilising classification systems developed by Helfert (1982); and Gentry, Newbold and Whitford (1985, 1990), this paper presents a summary of changes in the cash flow position of companies embarking on a share repurchase strategy. The results from the adoption of a repurchasing strategy show that subsequent to the repurchase, Net Working Capital flow components get smaller, Net Operating flow gets smaller while Net Investment flows increase. There also exist a clear cash flow effect leading up to the announcement period as well as reduced reliance on external funds. The findings are of interest to corporate executives, credit analysts, investors and other outside parties in evaluating the strategic and operational change occurring in firms who choose to repurchase shares. The results are also consistent with firms using share repurchase programs as a way of adjusting payouts.

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