The effects of stock repurchases on long-term operating performance in banking firms: An empirical study.

摘要

Corporate finance theory dictates that managers' decisions should lead to value maximization for the firm's shareholders. When firms have excess cash flow, managers have to choose among several alternatives to deploy the cash to add value to the firm. In the absence of profitable investments or debt reduction, they have to choose the best method to payout the excess cash flow to shareholders to avoid agency conflict. The principal mechanisms used by firms to distribute excess cash are dividends and share repurchases (announcing an open market or tender offer to buy back own shares), with an increasing percentage going to repurchases. The main focus of prior empirical research studies in the non-financial sector has been the effect of share repurchases on managers' wealth and its impact on the choice of cash payout mechanism.; The purpose of this study is to provide empirical evidence relevant to the application of existing share repurchase hypotheses to the banking firms while considering the exponential increase of management incentives during the study period. Two major themes are pursued using financial firms' data. First, management's desire to signal the market about future performance of the firm, and agency conflicts are reviewed. Second, the impact of the exponential growth in executive and employee options on share repurchase decisions and earnings management strategies are addressed.; This study draws upon the rich tradition of management actions---firm operating performance research in finance and accounting. It concentrates on management behavior and information asymmetry relative to the size of the firm and utilizes the methodology typical to market studies. Data was collected from Compustat, Federal Reserve Bank Holding Companies, and SEC Disclosure databases. Multiple regression and Logistic regression models are used to test hypotheses derived from prior empirical studies in the non-financial sector.; The obtained results lead to the following conclusions: (1) Cash flow and institutional ownership have a strong positive relationship to firm's operating performance, while leverage, asset size and market to book value ratio affect it negatively; (2) Size of repurchase and performance in satisfying prior repurchase commitments do not an have impact on the operating performance, contradicting the results of the signaling and time inconsistency hypotheses from the non-financial sector; (3) Executive options, transient cash flow and institutional ownership play a significant role in influencing management choice of repurchase over dividends in banks of all sizes, confirming the substitution hypothesis; (4) Total options do not show predictive ability of repurchases, contradicting the option funding hypothesis; and (5) Deferred tax expense and institutional ownership show significant positive impact on the likelihood of earnings management in banks, consistent with prior research in the non-financial sector.; This empirical study makes two important contributions to the accounting and corporate finance research. First, it tests the existing share repurchase hypotheses in the banking sector. Second, it examines the interaction of management incentives and firm characteristics relative to share repurchases in banking firms.