The cost of financial flexibility: Evidence from share repurchases

• Main Authors: Bonaimé, Alice A., Hankins, Kristine W., Jordan, Bradford D.
• Other Authors: Univ Arizona, Eller Coll Management
• Language: en
• Published: ELSEVIER SCIENCE BV 2016
• Subjects: Financial flexibility; Payout policy; Share repurchase; Earnings management; Corporate governance
• Online Access: http://hdl.handle.net/10150/617196; http://arizona.openrepository.com/arizona/handle/10150/617196

Over the last two decades, share repurchases have emerged as the dominant payout channel, offering a more flexible means of returning excess cash to investors. However, little is known about the costs associated with payout-related financial flexibility. Using a unique identification strategy, we document a significant cost. We find that actual repurchase investments underperform hypothetical investments that mechanically smooth repurchase dollars through time by approximately two percentage points per year on average. This cost of financial flexibility is correlated with earnings management, managerial entrenchment, and less institutional monitoring. (C) 2016 Elsevier B.V. All rights reserved.