What role taxes and regulation?: a second look at open market share repurchase activity in the United Kingdom

Oswald, D and Young, S (2002) What role taxes and regulation?: a second look at open market share repurchase activity in the United Kingdom. Working Paper. London Business School Accounting Working Paper.

Abstract

This paper reexamines the evidence on open market share repurchase activity reported by Rau and Vermaelen (2002) for the United Kingdom. Using data from the Securities Data Corporation (SDC), Rau and Vermaelen conclude that the level of repurchase activity is trivial. They attribute the low repurchase volume to regulatory restrictions that limit companies' ability to take advantage of an undervalued stock price and conclude that the bulk of repurchase activity that does occur is driven by the desire to generate tax credits for pension funds. Using data collected from a variety of sources, we find that the SDC understates open market buyback activity in the United Kingdom by as much as eighty percent. Based on our more comprehensive dataset we find that (a) pension funds are not the primary cause of U.K. share repurchases and (b) despite the prevailing regulatory environment, underpricing still represents an important driver of repurchase activity.