Motivation for Repurchases: A Life Cycle Explanation

This study examines the motives for share repurchases. Whereas most prior research points to either the signaling or free cash flow hypothesis, we find that the motives for repurchases differ depending on the firm’s life cycle stage. Specifically, we find that a firm in the growth stage tends to ann...

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Bibliographic Details
Published in:Journal of financial services research 2013-04, Vol.43 (2), p.221-242
Main Authors: Liang, Woan-lih, Chan, Konan, Lai, Wei-Hsien, Wang, Yanzhi
Format: Article
Language:English
Subjects:
Age
Analysis
Cash flow
Economics and Finance
Finance
Financial Services
Hypotheses
Hypothesis
Investments
Life cycles
Macroeconomics/Monetary Economics//Financial Economics
Motivation
Ratios
Repurchase
Return on assets
Securities buybacks
Signalling
Stock prices
Stocks
Studies
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Summary:This study examines the motives for share repurchases. Whereas most prior research points to either the signaling or free cash flow hypothesis, we find that the motives for repurchases differ depending on the firm’s life cycle stage. Specifically, we find that a firm in the growth stage tends to announce a repurchase program to signal its undervalued stock whereas a firm in the mature stage is prone to buy back shares to dispense excess free cash flow. We also find that the market reaction to repurchase announcements corroborates this life-cycle argument.
ISSN:0920-8550
1573-0735
DOI:10.1007/s10693-011-0126-7