Essays on the Impact and Effectiveness of Share Repurchase Regulations

Abstract

This dissertation contributes evidence on the effectiveness of different share repurchase regulations. Share repurchases, also known as stock buybacks, occur when a firm buys back its own stock, usually on the public market. Over the last three decades, repurchases have emerged as an important, yet controversial, form of shareholder payouts. Compared to dividends, repurchases give managers greater flexibility in the timing and magnitude of their firm's payouts. This allows managers to better manage temporary increases in cash and changes in capital structure, in addition to signaling undervaluation. With that said, critics are concerned that managers may misuse repurchases. Managers may have incentives to forego positive NPV long-term investments to increase stock prices in the short-term, coming at the cost of long-term firm value. One option to curtail the potential harmful impacts of repurchases is to increase transparency surrounding them. In solo-authored work, the first paper (Chapter 2) considers whether additional share repurchase legalization can reduce the frequency of value-decreasing repurchases. The SEC adopted its Share Repurchase Disclosure Modernization Rule (the modernized rule") in 2023. Relative to the previous disclosure rules, the modernized rule required additional disaggregation of quarterly repurchases to better show managerial repurchase intent. The modernized rule became effective in October 2023, but was vacated in December 2023. Due to different quarter start dates, the modernized rule was effective for some firms for nearly two months; other firms were never treated. Using this quasi-exogenous variation, monthly repurchase data and a staggered DiD design, my main tests find that the modernized rule reduces share repurchases amounts, primarily by reducing the number of repurchasing firms. In cross-sectional tests, efficient (value maximizing") repurchases decline significantly, while opportunistic (``value-decreasing") repurchases do not. The decline in efficient repurchases is consistent with the legal, liquidity and proprietary costs of disclosure outweighing the benefits of reduced information asymmetry. Meanwhile, the limited reduction in opportunistic repurchases suggests that additional disclosure has little to no impact on the manager’s private cost of repurchasing too many shares. Results using event study returns and repurchase prices corroborate these effects. Overall, the findings are consistent with additional repurchase disclosure having real effects on repurchases. It reduces repurchases; however, efficient repurchases decline and opportunistic repurchases are unaffected. Other critics of repurchases have argued for significant restrictions or even banning repurchases altogether. In co-authored work with Charles Wang, the second paper (chapter 3) evaluates these claims by re-examining the \textit{purported negative impact} of share repurchase legalization on corporate investment using staggered legal changes across 17 countries from the 1980s to 2000s. Considering \textit{all} public firms instead of just \textit{repurchasing} firms, we document increases in investment and firm performance. Cross-sectional tests are consistent with capital from repurchasing firms flowing to smaller, younger, higher-growth, and more cash-needy companies. The third paper (Chapter 4) challenges the robustness of Wang, Yin and Yu's (2021) direct finding that repurchasing firms reduce their investments after repurchase legalization. Employing more robust econometric methods and additional analyses, we find no consistent evidence that legalizing buybacks reduces investment among repurchasing firms. Thus, legalization does not appear to be harmful to repurchasing firms' investments either. These results suggest that legalizing repurchases may facilitate efficient capital reallocation rather than curtail aggregate investment. They contribute to the ongoing debate about the economic effects of share repurchases and have important implications for corporate finance literature and public policy. Policymakers should exercise caution when considering restrictions on share repurchases, as such policies may inadvertently hinder efficient capital allocation.