What Factors Affect Magnitude of Stock Repurchase Programs?

This paper investigates effects of firm size, cash flow, investment, valuation, and stock performance on the magnitude of share repurchase activity. I find that the number of shares repurchased is disconnected from the motivation to initiate a repurchase program, is not affected by an extent of stock undervaluation, and is mostly dependent on firm’s size. Furthermore, I find that managers have a “pecking order” among fundamentals considered when determining repurchase amount. I utilize an instrumental variable based on mutual fund price pressure that captures exogenous price changes and is unrelated to firm fundamentals. The instrumental variable allows to assess a degree of stock undervaluation and address endogeneity problem of using share price underperformance as a proxy for misvaluation. Furthermore, to ensure robustness of the findings, I use a quasi natural experiment setting to analyze a difference in repurchase activity during normal economic environment and 1987-1993 financial distress