1. 0 Determinants of Share Repurchases: International Evidence Bong-Soo Lee & Jungwon Suh December 12, 2008

2. 1 The Purpose of This Study We examine the patterns and determinants of share repurchases in seven major countries over the period 2000-2005. Australia, Canada, France, Germany, Japan, the U.K., and the U.S.

3. 2 Key Findings Non-U.S. firms do not use repurchases as much as U.S. firms. But, both U.S. and non-U.S. firms exhibit a common set of share repurchase behaviors. Repurchases are flexible; dividends are sticky. Firms generally do not use repurchases as a substitute for dividends.

4. 3 Key Findings (cont’d) Across countries, there are two distinct groups of repurchasing firms. Non-dividend-paying repurchasing firms are smaller, less profitable, at a relatively earlier stage of their life cycle, and experience higher profit volatility, as compared to dividend-paying repurchasing firms. Across countries, large (or excess) cash holdings are a key determinant of share repurchases.

5. 4 Our Contributions to the Literature We offer comprehensive international evidence on share repurchases. Our use of international data provides robust checks on several U.S. findings on corporate share repurchase policy. Unlike most prior U.S. studies, we document evidence to suggest: There are two distinct groups of repurchasing firms. Large or excess cash is a key determinant of share repurchases.

6. 5 Background/Prior Studies Nearly all published studies on repurchases look only at U.S. firms. Reasons for repurchasing shares Flexible distribution method Tax advantage of repurchases Signal undervaluation Stock options Takeover defense

7. 6 Data Firm-level data from Worldscope How we obtain the amount of repurchases: A cash-flow statement item: The amount of cash that firms expend to reduce common shares in circulation This approach is comparable to Grullon and Michaely (JF 2002). Sample period: 2000-2005

8. 7 Methodologies We divide payout policy into four categories: Type (A): Policy of making zero payout Type (B): Policy of only paying dividends Type (C): Policy of only repurchasing shares Type (D): Policy of both paying dividends and repurchasing shares We use transition matrices, multinomial logit regressions and Tobit regressions.

9. 8 Result 1: How Popular Are Repurchases? Table 2 & 3 Repurchases are not widely used by U.S. firms. In terms of both frequency and amount Dividends remain the more important payout method outside of the U.S.

10. 9 Result 1: How Popular Are Repurchases?

11. 10 Result 2: Flexibility of Repurchases Transition matrices in Table 4 They show: Repurchases are flexible, while dividends are sticky. Many repurchasing firms do not continue to repurchase shares in the subsequent year. Most dividend-paying firms continue to pay dividends in the subsequent year.

12. 11 Result 2: Flexibility of Repurchases 20022002 Sample period 2000-2005

13. 12 An interesting observation from the table It appears that firms generally do not switch from one payout method to the other. It is rare for firms that only repurchase shares to adopt dividends as their sole payout method. It is rare for firms that use dividends, either solely or in conjunction with repurchases, to adopt repurchases as their sole payout method. This implies that repurchases and dividends may not be substitutes for each other.

14. 13 Result 3: Are Repurchases Substitutes for Dividends? It appears that the majority of firms do not finance repurchases by reducing dividends. Across countries, repurchases are generally accompanied by dividend increases in the same year. In this sense, across countries, firms do not use repurchases as a substitute for dividends. Consistent with Guay and Harford (JFE 2000) and Dittmar (JB 2002).

15. 14 Result 3: Are Repurchases Substitutes for Dividends? On the other hand, it appears that firms repurchase shares using the cash that might otherwise be used to increase dividends. We find that, across countries, repurchasing firms increase dividends less often than non-repurchasing firms do. This observation is consistent with Grullon and Michaely (JF 2002).

16. 15 Result 3: Are Repurchases Substitutes for Dividends? Sample period 2000-2005

17. 16 Result 4: Firm Characteristics of Repurchasing Firms We examine the characteristics of two groups of repurchasing firms, as compared to dividend-only-payout firms. We look at 9 variables Note that there are two groups of repurchasing firms. In all countries, non-dividend-paying repurchasing firms (C) are smaller, less profitable, at an earlier life-cycle stage, and higher profit volatility than dividend-paying repurchasing firms (D).

18. 17 Sample period 2000-2005 Group (C) vs. Group (D)

19. 18 Across countries, non-dividend-paying repurchasing firms (C) are different from dividend-only-payout firms (B) on the following five variable (Table 7). Log(TA): Smaller in size CASH: Large Cash holding ROA: Less profitable RE/TE: At an earlier stage in life ROAVOL: Higher profit volatility Result 4: Firm Characteristics of Repurchasing Firms (Cont’d)

20. 19 Sample period 2000-2005 Group (B) vs. Group (C)

21. 20 Across countries, dividend-paying repurchasing firms (D) are different from dividend-only-payout firms (C) (Table 8). Log(TA): Larger in size CASH: Large cash holding Result 4: Firm Characteristics of Repurchasing Firms (Cont’d)

22. 21 Sample period 2000-2005 Group (B) vs. Group (D)

23. 22 Across countries, non-dividend-paying repurchasing firms (C) and dividend-paying repurchasing firms (D) have one thing in common, large cash holdings, as compared to firms that pay only dividends (B). Multivariate logit regressions confirm that, across countries, both groups of repurchasing firms have significantly greater cash holdings than firms that only pay dividends. Result 4: Firm Characteristics of Repurchasing Firms (Cont’d)

24. 23 Results 4: Firm Characteristics (Cont’d) (2) Compare repurchasing firms that pay dividends to firms that only pay dividends (Table 8). Log(TA): Larger in size CASH: Large cash holding Both groups of repurchasing firms have relatively high cash holdings, compared to firms that only pay dividends.

25. 24 Result 5: Determinants of the Amount of Repurchases Tobit regression for seven countries Dependent variable: Amount of repurchases Explanatory variables: 10 variables We test four hypotheses: Excess cash hypo: CASH (+) Undervaluation hypo: MBR and SRET (  ) Temporary cash flow hypo: NOPER (+) Optimal leverage hypo: LEVER (  )

26. 25 Table 9: Across countries, CASH enters consistently and significantly with a positive sign. Thus, we find support for excess cash hypothesis. There is relatively little evidence in favor of other hypotheses.  Result 5: Determinants of the Amount of Repurchases

27. 26 Sample period 2000-2005

28. 27 So far our results suggest: Across countries, large cash holdings are a key characteristic of repurchasing firms. Both groups of repurchasing firms large cash holdings, compared to dividend-paying firms. Cash holdings have a positive impact on the amount of repurchases.

29. 28 Robust check of excess cash hypothesis Additional Test 1: We examine whether repurchasing firms experience an increase in cash holdings before share repurchases. Additional Test 2: We examine whether repurchasing firms have large excess cash holdings, not just large cash holdings.

30. 29 Fig 1. Cash holdings of non-dividend- paying repurchasing firms ()

31. 30 Fig 2. Cash holdings of dividend-paying repurchasing firms ()

32. 31 Fig 3. Cash holdings of dividend- increasing firms (  and Δ)

33. 32 Additional Test 1 A median repurchasing firm experiences an increase in cash holdings. A median dividend-increasing firms do not experience a similar increase. The finding bolsters the impression that large cash holdings are a key determinant of share repurchases.

34. 33 Additional Test 2 We estimate excess cash holdings for each individual firm on the basis of Opler, Pinkowitz, Stulz and Williamson (1999)’s model. We then compare the mean and median excess cash holdings for four groups of firms.

35. 34 Additional Test 2 (Cont’d) We find that non-dividend-paying repurchasing firms (C) tend to have large excess cash holdings compared to no- payout firms (A). We find that dividend-paying repurchasing firms (D) tend to have large excess cash holdings compared to firms that only pay dividends (B).

36. 35 Sample period 2000-2005

37. 36 Conclusion While non-U.S. firms do not use repurchases as commonly as U.S. firms, both non-U.S. and U.S. firms display a common set of repurchase behaviors. For example, Repurchases are flexible; dividends are sticky. Repurchases are not used as a substitute for dividends.

38. 37 Conclusion (Cont’d) Across countries, there is strong evidence that distributing excess cash is the most importatn motive for share repurchases. Repurchasing firms have different firm characteristics depending on whether they also pay dividends. Many prior studies lump them together in analyzing repurchases. [Dittmar (JB 2002); Jagannathan et al. (JFE 2002)]

39. 38 Conclusion (Cont’d) Non-dividend-paying repurchasing firms rely solely on repurchases to distribute excess cash because their low and volatile profitability prevents dividends. Dividend-paying repurchasing firms repurchase shares also to distribute excess cash, while they continue to pay dividends out of stable cash flow.