UK corporate share repurchases: an empirical analysis of corporate motives and payout policies

Abstract

This thesis investigates the motives behind share buybacks in the UK, and examines this form of corporate payout in relation to dividends by extending traditional corporate dividend behaviour models to include payouts made through share repurchases. Using hand-collected data for 267 firms belonging to the FTSE 350 from 2001 to 2004, we show that the motives of firms in the UK to repurchase their shares appear to be different from those of US firms, which we mainly attribute to differences in corporate governance between the two countries. We find that the most plausible motive behind share buybacks in the UK is the distribution of surplus cash to shareholders although, contrary to US findings, UK share buybacks are related primarily to expected rather than unexpected earnings. Indeed, share buybacks appear to be paid out of the same expected earnings component as are dividends, which suggests that repurchases may be substitutes for (at least part of) regular dividend payouts. When we use behavioural dividend models, such as Lintner (1956) and Fama & Babiak (1968), to determine whether they can be extended to estimate changes in total payouts as opposed to just dividends, we find that firms that repurchase their shares tend to have a smoother dividend policy, which lends support to the substitution hypothesis of share repurchases. Further, we develop modified versions of these models in which we assume that dividends or total payout changes are the result of a full adjustment to expected changes in earnings and a partial adjustment to unexpected changes in earnings. We show that these models appear to better reflect the changes in total payout policy that have occurred in recent years in the UK.