The integration of share repurchases into US and UK listed firms’ financial decision-making

Abstract

This study explores the question whether share repurchases are an integral part of US and UK firms’ financial decision-making, or whether they are merely an afterthought and therefore not systematically related to managers’ principal financial decisions, namely dividends, investment and leverage. It aims to address concerns that share repurchases might be detrimental to firms’ ability to create value through investment (FINNOV, 2012) and can lead to the excessive leverage of companies (Foroohar, 2013). As the US and the UK display differences in terms of the legal and institutional environment, the first two chapters focus in the US and the UK respectively. The US findings indicate that share repurchases are driven not merely by free cash flows, but also by decisions about investment and dividends, and both dividends and investments are in turn affected by share repurchases. The fact that these results hold both for the period before and subsequent to the credit crunch suggests that share repurchases have become an essential consideration when managers take financial decisions in large US firms. By contrast, the UK research fails to show a consistent interaction between share repurchases and investment. Moreover, the findings suggest that share repurchases are being used as a complementary form of payout and not as a substitute. Considering the differences in the results from the first and second empirical chapter, the question arises, whether these are due to differences in the sample characteristics, as the size of S&P 500 companies tends to much larger than that of FTSE All Share Index companies, or whether they reflect country-specific institutional differences. This question is explored in the third empirical chapter. This research supports the contention that national differences in terms of regulatory frameworks and the development of financial markets can affect corporate decision-making (e.g. Bennedsen and Nielsen 2010, La Porta et al. 2000). More specifically, country specific factors appear to lead to a lower use of share repurchases in the UK possibly due to the stricter regulatory framework. In addition, UK firms seem to try to maintain higher dividend payout ratios than their US counterparts, which can be attributed to a culture of high dividend payouts. These differences seem to explain the non-integration of share repurchases into UK firms’ financial decision-making. Therefore, without considering country specific factors, it is not feasible to generalise economist concerns that share repurchases can be detrimental to firms’ ability to create value through investment (FINNOV, 2012) and for leading to the excessive leverage of companies (Foroohar, 2011).