Why do firms buyback their shares?: an analysis of open market share reacquisitions by U.K. firms

Oswald, D and Young, S (2002) Why do firms buyback their shares?: an analysis of open market share reacquisitions by U.K. firms. Working Paper. London Business School Accounting Working Paper.

Abstract

This paper explores the determits of share reacquisitions by U.K. firms over the period January 1995 to December 2000. We find that the repurchases appear to be used to distribute surplus cash and exploit perceived underpricing. Further analysis reveals that the surplus cash effect is more pronounced for firms characterised by low leverage and a limited investment opportunity set. Limited evidence also indicates that the association between share reacquisitions and surplus cash is stronger in the presence of poor contemporaneous share returns, consistent with the view that distributions of excess cash are timed to create further value for shareholders. Contrary to predictions, however, the probability that a firm distributes surplus cash via a share repurchase is lower when the underpricing occurs in the year prior to the repurchase.