Stock Repurchase Waves: An Explanation of the Trends in Aggregate Corporate Payout Policy
50 Pages Posted: 2 Dec 2002
Date Written: October 30, 2002
The use of stock repurchases has fluctuated dramatically over the last two decades: Aggregate repurchases peaked in 1999, when the use of repurchases came close to surpassing the use of dividends, and reached a low in 1991, when the repurchases amounted to only a quarter of dividends. Though several researchers document this trend in repurchases, there has been little explanation provided for why it occurs. In this paper, we investigate why stock repurchases occur in waves by explaining how the trends in aggregate payout policy relate to earnings and the overall economy. Specifically, we estimate the cointegrating relation between earnings and GDP and use the residual from this relation, the deviation in earnings from its trend, as a measure of transitory earnings. We find that repurchases increase with increases in both permanent and transitory earnings. However, the change in dividends paid is not related to transitory earnings but rather only permanent shifts in earnings that result from changes in the macro-economy. Further, transitory earnings are the primary driver in the choice between repurchases in dividends. These results indicate that dividends and repurchases are substitutes for distributing permanent earnings but that repurchases are also a mechanism to distribute transitory earnings.
Keywords: payout policy, repurchases, dividends, earnings cointegration
JEL Classification: G35, E32, M31
Suggested Citation: Suggested Citation