TY - JOUR
T1 - Precautionary versus Signalling Motive of Share Repurchases
T2 - Evidence from Policy Uncertainty and the COVID-19 Crisis
AU - Chen, Zhong
AU - Lei, Zicheng
AU - Xia, Chunling
N1 - Publisher Copyright:
© 2022 The Authors. British Journal of Management published by John Wiley & Sons Ltd on behalf of British Academy of Management.
PY - 2023/10
Y1 - 2023/10
N2 - Using policy-related uncertainty as a shock to firms’ internal and external financing frictions, we find significantly lower repurchase likelihood, short-term market reactions, and post-announcement completion rate of open market share repurchases during periods of high policy uncertainty. Firms are more likely to switch from a high- to low-commitment repurchase technique when policy uncertainty is high. In contrast, for firms that are significantly undervalued ex-ante, higher policy uncertainty leads to more repurchase activities. In addition, we show that the COVID-19 crisis is associated with lower repurchase likelihood for financially constrained firms or those with high cash flow volatility, while undervalued firms repurchase more shares during the pandemic period. Our results are robust after controlling for potential sources of endogeneity and conducting a battery of robustness tests. Collectively, our evidence suggests that the relationship between uncertainty and share repurchases are conditional on institutional contexts. Firms’ level of financial flexibility, their demand for signaling, the creditability and magnitude of repurchase signals, all significantly affect their precautionary and signaling motives.
AB - Using policy-related uncertainty as a shock to firms’ internal and external financing frictions, we find significantly lower repurchase likelihood, short-term market reactions, and post-announcement completion rate of open market share repurchases during periods of high policy uncertainty. Firms are more likely to switch from a high- to low-commitment repurchase technique when policy uncertainty is high. In contrast, for firms that are significantly undervalued ex-ante, higher policy uncertainty leads to more repurchase activities. In addition, we show that the COVID-19 crisis is associated with lower repurchase likelihood for financially constrained firms or those with high cash flow volatility, while undervalued firms repurchase more shares during the pandemic period. Our results are robust after controlling for potential sources of endogeneity and conducting a battery of robustness tests. Collectively, our evidence suggests that the relationship between uncertainty and share repurchases are conditional on institutional contexts. Firms’ level of financial flexibility, their demand for signaling, the creditability and magnitude of repurchase signals, all significantly affect their precautionary and signaling motives.
UR - http://www.scopus.com/inward/record.url?scp=85141502987&partnerID=8YFLogxK
U2 - 10.1111/1467-8551.12668
DO - 10.1111/1467-8551.12668
M3 - Article
AN - SCOPUS:85141502987
SN - 1045-3172
VL - 34
SP - 1750
EP - 1773
JO - British Journal of Management
JF - British Journal of Management
IS - 4
ER -
