Open Market Share Reaquisitions, Surplus Cash, and Agency Problems
This study compares firms whose share repurchases are motivated by surplus cash considerations with a cash performance-matched sample of nonrepurchasing firms. Holding investment opportunities and external financing costs constant, we find that repurchasing firms are characterised by significantly greater external shareholder power. We find no evidence that repurchases occur at the expense of lower-than-expected dividend payments. During the two-year postrepurchase period, repurchasers are forty-one percent less likely than their nonrepurchasing counterparts to be targeted in a disciplinary corporate control contest and fifty-six percent less likely to fail. Our findings suggest that the timely distribution of surplus cash through an open market share repurchase is partially contingent on the extent of agency problems between corporate insiders and external shareholders.