Real Effects of Share Repurchases Legalization on Corporate Behaviors

Abstract

This paper examines the real impacts of share repurchases legalization on corporate behaviors. To ensure causality, we use an exogenous shock induced by staggered share repurchases legalization in 17 markets across the world from the 1980s to 2000s, and we focus on firms for which stock buybacks are triggered by the legalization instead of firm-specific factors. We find that these share-repurchasing firms do not cut dividends as a substitution. The source for repurchasing shares comes from internal cash instead of external debt issuance, leading to reductions in capital expenditures and R&D expenses. This strategy boosts stock prices, whereas it is detrimental to long-run firm valuation, as implied by lower Tobin’s Q and market capitalization and lower beneficiary ownership.