Corporate Share Repurchases: The Perceptions and Practices of

Corporate Share Repurchases:The Perceptions and Practices of UK Financial Managers and Corporate Investors

Researchers: Alpa Dhanani Roydon Roberts

Corporate Share R

epurchases: The Perceptions and Practices of UK

Financial Managers &

Corporate Investors

Corporate Share Repurchases: The Perceptions and Practices of UK Financial Managers and

Corporate Investors

The recent financial crisis has brought to an end the extensive share repurchase activity seen in the last 25 years in UK listed companies. At the moment it is difficult to see when and if share repurchase activity will increase and what the repercussions will be for companies who have bought back their shares in recent years.

This research study, which started before the credit crunch, investigates the motivations for share repurchases and the perceptions of their use by both the corporate and investor community. The findings of this research may act as a useful guide in this new uncertain future as to whether share repurchases will continue to be used and, if so, in what circumstances and by which companies.

The study uses a survey approach to obtain the views of managers of investment and non-investment companies and the investor community. Perceptions on the motivations for share repurchase activity are compared and contrasted as well as reflections on the role of regulation. The report concludes with four policy implications for managers and investors to consider.

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Dhanani Covers - Oct 09.indd 1 16/11/2009 16:34

CORPORATE SHARE REPURCHASES:THE PERCEPTIONS AND PRACTICES OF UK FINANCIAL

MANAGERS AND CORPORATE INVESTORS

by

Alpa DhananiRoydon Roberts

Cardiff University

Published by

The Institute of Chartered Accountants of ScotlandCA House, 21 Haymarket Yards

Edinburgh EH12 5BH

Dhanani Report - 2009.indd 1 12/11/2009 13:46:08

First Published 2009The Institute of Chartered Accountants of Scotland

© 2009ISBN 978-1 904574-54-5

EAN 9781904574545

This book is published for the Research Committee ofThe Institute of Chartered Accountants of Scotland.

The views expressed in this report are those of the authors and do not necessarily represent the views of

the Council of the Institute or the Research Committee.

No responsibility for loss occasioned to any person actingor refraining from action as a result of any material

in this publication can be accepted by the authors or publisher.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in

any form or by any means, electronic, mechanical, photocopy, recording or otherwise, without prior permission of the publisher.

Printed and bound in Great Britain by T. J. International Ltd.


Contents

List of Abbreviations ..................................................................... iForeword ...................................................................................... iiiAcknowledgements ........................................................................ vExecutive Summary ...................................................................... vii

1. IntroductIon .......................................................................... 1

The context of the research study ................................................. 1 The research questions ................................................................. 11 Structure of the report ................................................................. 11

2. LIterature revIew .................................................................. 13

Introduction ................................................................................ 13 Theoretical motivations underlying the use of share repurchase

programmes ................................................................................. 14 Repurchases by investment companies ......................................... 21 Prior empirical research ............................................................... 24 Summary ..................................................................................... 33

3. research Methods ................................................................. 35

Introduction ................................................................................ 35 Research approach ....................................................................... 35 Questionnaire responses .............................................................. 41 Summary ..................................................................................... 43


Contents

4. FInancIaL Managers oF non-InvestMent coMpanIes ................ 45

Introduction ................................................................................ 45 Respondent characteristics ........................................................... 45 Motivations for share repurchase programmes .............................. 50 Motivations underlying actual share repurchases .......................... 59 Reasons for decisions not to participate in share repurchase

programmes ................................................................................. 62 Non-investment companies and regulation .................................. 63 Summary ..................................................................................... 64

5. FInancIaL Managers oF InvestMent coMpanIes ......................... 67

Introduction ................................................................................ 67 Respondent characteristics ........................................................... 67 Motivations for share repurchase programmes .............................. 71 Motivations underlying actual share repurchases .......................... 78 Reasons for decisions not to participate in share repurchase

programmes ................................................................................. 80 Investment companies and regulation .......................................... 81 Summary ..................................................................................... 81

6. the vIews oF Investors ............................................................ 83

Introduction ................................................................................ 83 Respondent characteristics ........................................................... 83 Motivations for share repurchase programmes .............................. 88 Regulation surrounding share repurchases in the UK ................... 101 Summary ..................................................................................... 103


Contents

7. concLusIons ............................................................................ 105

Introduction ................................................................................ 105 Motivations for share repurchases: non-investment companies .... 105 Motivations for share repurchases: investment companies ............ 107 Motivations for share repurchases: investors ................................. 108 Reflections into the role of existing UK repurchase regulation ..... 109 International comparison ............................................................. 110 Policy implications ...................................................................... 110 Limitations and areas for future research ...................................... 111 Summary ..................................................................................... 112

reFerences ...................................................................................... 113

appendIx 1 Views of financial managers of non-investment companies ..................................................................... 117

appendIx 2 Views of financial managers of investment companies 123

appendIx 3 Views of investors .........................................................129

about the authors ........................................................................ 135


List of AbbreviAtions

AIM Alternative Investment MarketBHR Buy and hold returnsDPS Dividend per shareDRIP Dividend reinvestment planEPS Earnings per shareESOPS Employee share ownership plansESOs Employee stock optionsFAME Financial Analysis Made EasyFSA Financial Services AuthorityICTA Income and Corporation Taxes ActLSE London Stock ExchangeNAB Net asset backingNAV Net asset valueOEICs Open ended investment companiesS&P Standard & Poor’sSIC Standard industry classificationUK United KingdomUKLA UK Listing AuthorityUKSA UK Shareholders’ AssociationUS The United States of America


Foreword



The study finds that the motivations for share repurchase activity differ between investment and non-investment companies. For non-investment companies the major motivation is to return cash to shareholders whereas for investment companies the major motivator is management of the Net Asset Value (NAV) per Share and the resultant discount to NAV. Non-investment companies do not use share repurchases to replace regular dividend payments and there is only marginal support from investors and corporates that share repurchases increase share price.

In terms of regulation, interestingly with hindsight, some investors believed that share repurchase activity had spiralled out of control and some thought that there was a need for further regulation. Corporates however generally believed that the current level of regulation was appropriate.


Forewordiv

This project was funded by the Scottish Accountancy Trust for Education and Research (SATER). The Research Committee of The Institute of Chartered Accountants of Scotland (ICAS) has also been happy to support this project. The Committee recognises that the views expressed do not necessarily represent those of ICAS itself, but hopes that the project will add to the knowledge about share repurchases in these uncertain economic climes.

David SpenceConvener, Research CommitteeNovember 2009


Acknowledgements

The authors wish to express their gratitude to all the participants in the survey, all those who acknowledged the survey but were unable to participate in it and also the three individuals who kindly agreed to participate in the interviews. The authors also acknowledge the support from The Institute of Chartered Accountants of Scotland; and the insightful comments from the two anonymous reviewers and the Director of Research at ICAS, Christine Helliar and those who agreed to participate in the pilot study. In addition, the authors would like to thank Michelle Crickett, the Assistant Director of Research at ICAS and Angie Wilkie, the Research Co-ordinator at ICAS for their efforts in arranging the interviews and involvement throughout the study.

Finally, the Research Committee and the researchers are grateful for the financial support of the Trustees of the Scottish Accountancy Trust for Education and Research, without which the research would not have been possible.


Executive summAry

Share repurchase activity became a global phenomenon in the late twentieth century. Previously restricted largely to the US, repurchase programmes have been widely adopted in Europe and other countries such as Japan. In 2005, the global volume of share repurchase programmes was estimated at approximately US$400 billion (Vermaelen, 2006). In the UK, where share repurchase programmes were legalised in 1981, activity grew extensively and by 2006, it is estimated that British companies spent a record £46 billion on buying back their shares compared with the annual spend of £10 billion during the late 1990s. Further, the UK exhibited a significant rise in the percentage of companies engaged in share repurchase programmes and at the start of the twenty first century, the volume of activity in companies listed on the London Stock Exchange and the Alternative Investment Market exceeded that of their counterparts listed on the US stock exchanges (Scholey, 2007).

Since 2007, however, market conditions in the UK and globally have changed markedly as a result of the global financial crisis: major western economies have moved into recession, and there has been an unprecedented number of companies that have issued profit warnings, and filed for bankruptcies. Finance for companies has been characterised by a paralysis in the money markets and as a consequence, the growth in share repurchase activity has rapidly reversed. In the US, for example, share repurchases by S&P 500 companies in the third quarter of 2008 were 44% down on the same period in 2007 (Prince, 2008) and a similar trend was experienced in the UK FTSE 100 companies, who for year ends between June 2008 and March 2009 reported a fall of some 43% compared to the same period the previous year.


viii exeCutive summary

Notwithstanding the reversal in growth, share repurchases continue to be an important financial management tool for companies. Indeed, despite the fall of nearly one half between 2007 and 2008 US share repurchases continue to far exceed dividend payments (Prince, 2008). The motivations underlying them and their impact on company value therefore remain of significant interest, and two key interrelated questions that have arisen as a result of the surge in share repurchase activity are: (i) in what capacity are share repurchase programmes used; and (ii) why did activity in the UK soar after legalisation up until the financial crisis, and throughout the world, more generally? Several motivations have been put forward to explain the use of share repurchase programmes by companies, including:

• substituting for regular or special dividends;

• signalling future performance and/or current undervaluation of shares to the markets;

• optimising the capital structure of companies;

• managing principal-agent problems;

• reallocating capital in the markets efficiently;

• influencing reported financial performance;

• protecting against potential takeovers; and

• influencing share prices and managing the market liquidity of companies’ shares.

Prior empirical research has presented mixed and ambiguous results in relation to the usefulness and value of repurchase programmes, and the subject area remains relatively under-researched in comparison to other areas of financial management.


ixexeCutive summary

In this context, using a survey approach, this report seeks to examine UK managers’ and investors’ views in relation to the motivations underlying, and factors influencing, the use of share repurchase programmes in UK listed companies. Specifically, it:

• captures the views of managers of both repurchasing and non-repurchasing companies on the general motivations underlying share repurchases and, where appropriate, the specific reasons for actual repurchases;

• distinguishes between the views of managers of share repurchasing and non-repurchasing companies to help explain the differences in practice, and why repurchase programmes are not adopted universally;

• examines the views of financial managers of both investment companies and non-investment companies separately in recognition of the different circumstances and characteristics of the respective organisations; and

• ascertains the views of the investor community to facilitate a comparison of the views and perspectives of investors with those of managers.

The results of the survey, based on usable responses from an individual from 97 non-investment companies, 53 investment companies and 57 investors are discussed below. For the purposes of this survey investment companies were defined as those which invest in a diversified portfolio of assets such as shares and securities of other companies; more specifically those included on the equity investment instruments and non-equity investment instruments sectors on the London Stock Exchange. To supplement the survey findings, interviews were undertaken with three individuals from the pension fund and investment fund sectors. The number of interviews undertaken was limited due to a reluctance amongst institutional investors to be interviewed during a period of significant market turbulence.


x exeCutive summary

Motivations underlying the use of share repurchases: non-investment companies

• Open market share repurchase programmes, generally financed by existing cash balances, dominate repurchase activity by non-investment companies in the UK.

• Repurchase programmes appear to be motivated by a desire to return excess cash flows to shareholders, and this perhaps serves to explain the fall in activity during the financial crisis when liquidity in the markets has become a major concern. Other factors that encourage repurchases include: a wish to influence reported earnings per share (EPS) levels; signal undervaluation to capital markets; optimise companies’ gearing ratios; and management believe that the primary beneficiaries of such programmes are shareholders.

• Share repurchases, it is clear, are not used to replace regular dividend payments and appear to arise from a different set of circumstances and situations than dividend payments. Moreover, they are not used because they are considered to be fashionable, or an emerging trend in the markets. Just over one quarter of companies use them to influence their share prices.

• Overall, a select group of reasons listed above appear to drive UK repurchase activity, although in most companies, a multiplicity of factors, rather than a single reason, appear to be responsible.

• The views of managers of companies engaged in repurchasing activity are broadly in line with the general views of managers of both repurchasing and non-repurchasing companies. However, there are some differences in the opinions expressed; for example, although over half the companies generally agreed that signalling undervaluation and facilitating capital reallocation in the markets underlie repurchase programmes, only a small minority of repurchasers cited them as influencing their particular repurchases. Similarly, whilst repurchases are seen in general as a substitute for special, although not regular,


xiexeCutive summary

dividends only four repurchasers cited dividend substitution as motivating their particular repurchase activity.

• There appears to be little difference between the views of managers of repurchasing and non-repurchasing companies in relation to the general motivations underlying repurchases, suggesting that differences in perceptions between the two groups do not explain why this method of cash disbursement is used. Rather, the lack of funds to engage in repurchase activity and concern about adverse shareholder responses appear to explain the absence of participation by non-repurchasing companies in repurchase schemes.

Motivations underlying the use of share repurchases: Investment companies

• Investment companies also rely heavily on open market share repurchases, although tender offers are also used.

• The main factors contributing to the use of share repurchase programmes among repurchasing investment companies appear to be the management of Net Asset Value per Share (NAV) and discount to NAV, both of which are specific to investment companies. Managing market liquidity is also an important factor for investment companies, in contrast to non-investment companies.

• Once again the specific motivations identified by repurchasing companies are consistent with the views expressed in general terms by both repurchasing and non-repurchasing investment companies.

• Further, the views of managers of repurchasing and non-repurchasing investment companies are very similar, and any differences generally relate to the strength with which the views are held. Repurchasing companies expressed stronger views: agreeing more strongly with statements that generated positive overall responses and disagreeing


xii exeCutive summary

more strongly with statements that were unfavoured. As with non-investment companies above, these results indicate that decisions to engage in/refrain from share repurchases are not a result of differences in perceptions of such programmes between repurchasing and non-repurchasing companies; rather, the absence of significant benefits from such programmes for the respective companies and/or the associated costs contribute to the lack of activity.

Motivations underlying the use of share repurchases: Investors

• Comparing investor views with those of managers, a number of reasons for using share repurchase programmes attracted more managerial support than investor support, and equally there were a few that attracted more investor support than managerial support. Only one area, that relating to the impact of share repurchase programmes on corporate share price, generated closely synchronised views between management and investors. Specifically, both groups only marginally supported the views that share repurchases increase share price, and believed that changes to company value, if any, were likely to be gradual and over a long-term period.

• Reasons that attracted relatively more managerial support include: capital reallocation in which surplus funds are returned to investors in the absence of value enhancing projects; the flexibility of share repurchase programmes and their substitutability in relation to special dividends; the role of share repurchase programmes in influencing corporate gearing levels; and the signalling of both share price undervaluation and expectations of future income.

• Areas that attracted relatively more investor attention/support included: the notions that share repurchase announcements enable companies to generate publicity in the markets; that repurchase programmes may be used to influence total future dividend payout levels; and that repurchase programmes may be an emerging trend in


xiiiexeCutive summary

the capital markets. Moreover, investors provided more support for the view that share repurchase programmes mitigate the principal-agent problem by reducing opportunities for management to engage in behaviours which benefit themselves at the expense of investors. Nevertheless, the interviewees also highlighted the potential of such programmes to exaggerate principal-agent concerns by influencing EPS levels upon which managers are evaluated, and indeed investors in the survey identified managers, bankers and advisors as significant beneficiaries of such programmes, alongside shareholders.

• These differences in managerial and investor views above question: (i) whether managerial action through share repurchase programmes gives rise to the intended investor reaction; and (ii) whether investors approve the use of share repurchase programmes for the same reasons as management.

Perceptions in relation to regulation surrounding share repurchase activity in the UK

• Investors and corporate managers alike believe that the current regulation under which share repurchase programmes in the UK are undertaken adds credibility to such programmes and also provides an opportunity to educate shareholders.

• Focusing on specific regulation, sub-groups of both investment companies and non-investment companies report that the listing requirements surrounding the volume, pricing and/or timing of repurchase programmes restrict the usefulness and value of share repurchase programmes, and this view is indeed shared by some of the investors. In relation to regulation concerning the reporting requirements to the Financial Services Authority and the opportunity to hold treasury shares, neither managers (from both investment companies and non-investment companies) nor investors consider such regulation to be restrictive.


xiv exeCutive summary

• Addressing shareholder involvement in the approval process for share repurchase programmes, financial managers broadly believe that this requirement does not curb corporate activity. At the same time investors, on average, appear to believe that they are playing a relevant role and that their current level of involvement is valuable. A small group nevertheless believe that share repurchase activity has spiralled out of control and that more regulation is required to protect shareholder wealth; unsurprisingly this view is not shared by corporate managers.

International comparisons

On comparing the motivations that influence repurchase activity in UK companies, with those reported in prior Australian and US surveys, there are some notable differences. UK companies tend to emphasise the need to return surplus cash to investors and adjust gearing levels while their Australian and American counterparts emphasise the need to influence reported EPS levels, and purchase undervalued shares in order to effect share price changes. These differences may be a result of the stringent regulatory environment in the UK in which timing and volume restrictions limit the opportunity to signal undervaluation and directly influence share price. As such, regulation in the UK appears to be having the desired effect: to curb repurchase activity which seeks to influence company share price. However, management, in general, do not feel restricted by the regulation.

Other contributory factors for the differences in results, compared to Australian and US companies, may stem from the different time periods of the surveys in each country which reflect different market and operational conditions. For example, recent developments in corporate governance activities may be responsible for encouraging companies to return surplus cash to their shareholders.


xvexeCutive summary

Implications

The policy implications arising from this study are:

• Managers and more importantly, non-executives with their fiduciary responsibilities, need to carefully assess recommendations from bankers and advisors in relation to share repurchase programmes because, as highlighted in the investor survey, they stand to gain from such programmes and thus their advice may lack objectivity.

• When managers use share repurchase programmes to capitalise on those characteristics which distinguish them from other distribution methods, they should emphasise the particular benefits such programmes generate which are, or may not be, provided by alternative distribution methods. A more extreme version of this, as suggested by the UK Shareholders’ Association (UKSA) and supported by one of the interviewees in the study, is that regulation that requires companies to justify their use of share repurchase programmes over alternative distribution methods should be put in place.

• In addition, as suggested by one of the interviewees, to demonstrate good practice, management might report on the outcome of share repurchase transactions post-event to demonstrate the value of such programmes for investors. The UKSA once again holds a more stringent view and believes that regulation should be put in place to enforce such practice.

• Finally, from a shareholder perspective, while investors seek to discount the impact of share repurchase programmes on EPS levels to determine the ‘true’ level, managers may nevertheless be inclined to attempt to manipulate this ratio if their reward structures are tied to it. Indeed, as seen in the investor survey, managers are seen to be significant beneficiaries of such programmes and thus, where appropriate, investors should campaign for a change in such reward structures.


1introduction

The context of the research study

Share repurchase activity became a global phenomenon at the end of the twentieth century. Previously restricted largely to the US, repurchase programmes were widely adopted in Europe as well as in other countries such as Japan. In 2005, the global volume of share repurchase programmes was estimated at approximately US$400 billion (Vermaelen, 2006). At the turn of the century, in the US alone, corporate expenditure on share repurchases as a percentage of earnings was ten times higher than it was in the early 1980s; indeed during the late 1990s US companies for the first time spent more money repurchasing their shares than on paying dividends (Grullon and Michaely, 2002). This wave of share repurchase programmes continued to persist during the early years of the 21st century, and in the second quarter of 2005 share repurchases by US companies included in the Standard & Poor’s (S&P) 500 index totalled $82 billion, 92% higher than that over the same time period in the previous year (Postelnicu, 2005) and by the second quarter of 2007, activity had risen to $157 billion (Prince, 2008). Elsewhere, where repurchase activity was traditionally discouraged or even prohibited, repurchases have flourished, and after 2000 the number of share repurchase announcements made by non-US companies has exceeded that made by US companies (Vermaelen, 2006).

In the UK, repurchase activity was introduced and legalised in 1981 and rose to an annual spend of £10 billion in the late 1990s, approximately eight times higher than that a decade earlier (Lasfer, 1998). Repurchase activity continued to soar during the first few years of the 21st century, and it is estimated that in 2006 British companies


2 Corporate Share repurChaSeS

spent a record £46 billion on buying back their shares (Durrant, 2007), a remarkable growth rate of 64% on the previous year, and a notable comparison to the annual dividend spend of £62 billion in the same year (Connon, 2007). Whilst giants such as Vodaphone, Shell and BP were deemed to be responsible for a significant proportion of repurchase activity (a combined repurchase value of £21 billion in 2006), the percentage of companies engaging in share repurchase programmes increased threefold between 1998 and 2007 (Hasell, 2007). Moreover Scholey (2007) reported that, at the turn of the century, the volume of activity in companies listed on the London Stock Exchange (LSE) and the Alternative Investment Market (AIM), for the first time, was higher than that of their counterparts listed on the US stock exchanges.

Since 2007, however, market conditions in the UK and globally have changed markedly as a result of the global financial and economic crisis. The major western economies have moved into recession, with the UK gross domestic product (GDP) suffering five successive quarters of declining up to June 2009 and an overall fall of 5.7%. There has been an unprecedented number of companies that have issued profit warnings, and a large number of bankruptcies, vividly demonstrating heightened distress in the economy. The credit crunch has created extraordinary volatility in UK and world financial markets. The value of the FTSE 100 index fell from over 6700 in October 2007 to under 3800 a year later, and after rallying to over 4600 in January 2009 fell back below 3500 in March 2009 before recovering to over 4700 by August 2009. Corporate finance has been characterised by a paralysis in the money markets with liquidity concerns even amongst the top-end companies. Management have found it difficult to obtain debt finance, and with the volatile and disturbed state of the FTSE index, they have also struggled in the equity markets.

In the light of these changed economic and financial conditions, the growth in share repurchase activity was rapidly reversed. In the US, for example, share repurchases by S&P 500 companies in the second quarter of 2008, at $89 billion, were 44% down on the same period in


3IntroduCtIon

2007 (Prince, 2008). A similar reversal of growth was experienced in the UK, for example; share repurchases reported by companies included in the FTSE 100 index, for year ends between June 2008 and March 2009, were approximately £22 billion, some 43% below the figures reported a year earlier (approximately £38 billion). At the same time, many companies were also cutting dividend payouts, with one forecast suggesting that dividend payouts by UK companies in 2009 would be 13% lower than in the previous year (Jones, 2009).

Notwithstanding the reversal in growth, share repurchases continue to be an important financial management tool for companies. Indeed, despite the fall of nearly one half between 2007 and 2008 US share repurchases continue to far exceed dividend payments (Prince, 2008). The motivations underlying them and their impact on company value therefore remain of significant interest.

Two key related questions that arise in relation to share repurchase programmes are: (i) in what capacity are they used; and (ii) why did repurchase activity soar after they were legalised up until the credit crunch in the UK, and also more generally? Notwithstanding the surge in repurchase activity in the UK and elsewhere, the impact of repurchases on company value, and, in turn, shareholder wealth, remains ambiguous, and compared to the impact of dividend policy on company value, relatively under-researched.

Given the financial objective of maximising shareholder wealth, then, as companies invest in value-generating projects to enhance their market values, two key considerations arise: (i) how can these companies return the wealth/income generated to their shareholders; and (ii) does the wealth return process itself serve to enhance company value? In relation to the former question, methods of wealth distribution in addition to share repurchase programmes include: regular cash dividend payments; special dividend payments; scrip dividends; and dividend reinvestment plans (DRIPs). The latter question in relation to share repurchase programmes is addressed in chapter two. Discussion of share



repurchases in the financial management literature has principally been subsumed in the discussion of dividend policy, although as discussed in the next chapter it also features in discussions of corporate restructuring.

Share repurchases, often referred to as share buy-backs, are the repurchase of the existing shares of a company by the company itself. They enable companies to return wealth to shareholders in exchange for their shares. The shares repurchased may subsequently be cancelled or re-used at a later date. As a method of returning wealth to shareholders, share repurchase programmes are akin to cash dividends, where companies, in the UK, usually pay an interim dividend and a final dividend based on year end results. Moreover, companies may supplement regular dividend payments with special dividend payments which as one-off payments are usually made when companies have generated an additional income that does not form a part of their regular activities and management want to convey to the markets that such payment will not recur regularly as the source of the income is unlikely to recur regularly. A critical difference between share repurchase programmes and cash dividends lies in the fact that shareholders receiving dividend payments receive a return without a trade in exchange, that is, without a need to relinquish a part of their shareholding. An additional consideration is whether share repurchase programmes are analogous to regular cash dividends that are offered to shareholders on a regular, routine basis or whether they imitate the special, one-off dividend payments. Depending upon the context in which they are used, representing either a longer-term commitment or an occasional event, share repurchase programmes can have different motivations.

Share repurchase programmes can also be compared to the two additional methods with which to return wealth to shareholders: namely scrip dividends and DRIPs. Scrip dividends offer investors a choice of company shares in place of a cash dividend, although shareholders are not obliged to take them up, while DRIPs entail a cash payment to shareholders as a dividend which is subsequently exchanged for new company shares. An immediate advantage of scrip dividends and DRIPs


5IntroduCtIon

to companies is that they do not necessarily entail a payment of cash and they enable relatively illiquid companies to offer their shareholders a return and allow growth companies to retain corporate income for future investment projects. However, although share repurchase programmes are comparable to scrip dividends and DRIPs in that they offer shareholders a proportional return of their wealth, in another sense they are effectively an antithesis to scrip dividends and DRIPs in that they entail buying back shares rather than issuing new shares, and using up cash resources rather than avoiding the payment of cash returns. Indeed companies may engage in repurchase programmes as a method with which to acquire shares for redistribution as scrips and DRIPs.

In practice, share repurchase programmes may be enacted in a number of different ways including the use of open market repurchases, fixed price tender offers, Dutch tender offers and private arrangement repurchases. Open market repurchases are the most popular form of repurchase programmes and represent some 90% of all share repurchase activity (Oswald and Young, 2004). Companies repurchase shares from current sellers in the open market either directly or through a broker. Repurchases in this manner are generally the cheapest way to reacquire shares, although there are often timing, volume and pricing restrictions imposed upon them, the result of which may be that the process of repurchase may be slower, and the impact of the repurchase, smaller.

Fixed-price tender offers are situations in which a company tenders to buy a specific number of shares at a stated price by a certain date from existing shareholders and interested shareholders participate in the repurchase programme. There are generally no specific volume restrictions imposed under this method, and companies can make relatively large changes to their outstanding shares in a short span of time, although there is a possibility that the programme will be under-subscribed and the desired impact will, in turn, be reduced. On the contrary, there also remains a possibility that the repurchase programme is oversubscribed in which case management may either increase the



number of shares to be repurchased, or acquire shares from interested parties on a pro-rata basis.

The Dutch tender offer, a relatively new approach, is a more sophisticated version of the fixed-price tender offer; companies specify a range of prices at which they are willing to repurchase shares and seek views from investors of the price(s) they are willing to accept. Together with indicating a potential selling price, shareholders state the number of shares that they are willing to tender. At the close of the offer period, management determine the final price by totalling the number of shares tendered, starting from the lowest price range, until they reach the number of shares intended to be acquired. The final price, the clearing price, is paid to all sellers offering the price itself and all those offering a price lower than it; all sellers tendering at a price higher than the clearing price are excluded from the deal. The advantage of a Dutch tender over a fixed-price share repurchase is that there is a chance that a company can acquire the shares at a lower price than it may itself have set under a fixed-price tender since pessimistic shareholders, who expect the market share price to fall, will sell their shares at prices at the lower end of the range specified.

Finally, companies can make arrangements with large investors to engage in private transactions. It is possible that investors in this case may be in a poor negotiating position because they will tend to participate in such schemes when they need to enhance the liquidity of their investments. Private arrangement repurchases, while popular in the US where repurchase activity first gained momentum are becoming increasingly uncommon (Vermaelen, 2006).

As mentioned above, share repurchase activity in the UK was legalised in 1981. Currently it is governed by the Companies Act 2006 and the UK Listing Authority (UKLA) Listing Rules. While regulations pertaining to repurchase activity are more stringent than those in the US, where the origins of repurchase programmes lie, they are closely aligned to those of other large stock markets (as shown in Table 1.1, adapted from Kim et al., 2005).


7IntroduCtIon

Regulation surrounding repurchase activity in the UK can be broadly categorised into three groups:

(i) operational requirements set-up by the UKLA and from the Companies Act;

(ii) conditions agreed with shareholders; and

(iii) reporting requirements as set out by the UKLA.

Regulation principally protects shareholder interests by preventing companies from influencing market behaviour through large transactions and/or inflating share prices through purchases at a premium and preventing insider trading during periods of high information asymmetry which may benefit management at the expense of shareholders.

Statutory regulations permit companies to repurchase their shares without limit subject to the overriding requirement that the company must retain a minimum share capital. However, for open market repurchases, according to the UKLA, the repurchase volume cannot exceed 15% of the number of shares outstanding of any class of equity; if it does, then the repurchase is treated as a tender offer repurchase (Kim et al., 2005). In addition, the repurchase price for open market repurchases cannot exceed 105% of the average share price five days prior to the repurchase day and companies can also not engage in repurchase activity during ‘close periods’, periods during which information asymmetry between managers and investors is at its highest and during which managers themselves are not allowed to trade for similar reasons. Close periods are defined as periods of one or two months immediately preceding the preliminary announcement of companies’ annual results. Furthermore, directors and managers are not allowed to trade shares when a repurchase is underway. Moreover, until recently, companies were required to cancel all the reacquired shares immediately after the reacquisition and were not allowed to hold them as treasury shares.



This rule prevented companies from holding shares as treasury shares for reissue as employee stock ownership schemes (ESOPs) and other similar programmes/purposes and also prevented companies from buying shares at a cheaper price and selling them at a higher price. If companies wanted to use share re-acquisitions for ESOPs, management had to set up wholly-owned independent trusts that engaged in repurchase activity for this purpose only, and re-acquisitions in this manner were not classified as share repurchases. This situation changed in December 2003 so that companies are now able to hold up to 10% of any class of listed shares as treasury shares, although regulatory and disclosure requirements remain extensive (Freshfields Bruckhaus Deringer, 2003).

In addition to operating within the rules specified above, UK companies can only engage in repurchase activity subject to formal prior approval from shareholders to do so. Shareholder approval is valid for a period of 18 months and is normally sought at annual general meetings. Specific terms and conditions under which repurchase activity can take place are also agreed and include issues such as:

(i) the purpose for which the programmes will be used;

(ii) the maximum volume of shares that can be repurchased;

(iii) the minimum - maximum price range at which they can be repurchased; and

(iv) any other considerations that shareholders may deem appropriate.

Finally, companies engaged in repurchase activities need to adhere to tight disclosure requirements. First, an open market repurchase decision has to be reported immediately to the Financial Services Authority (FSA) acting as the UKLA. Second, once the repurchases have been made, these too must be reported to the UKLA as soon as possible and no later than 7.30 am on the following business day. Information which is required to be disclosed comprises the date of the purchase, the number of shares


9IntroduCtIon

repurchased, and the highest and lowest purchase prices in a day. Finally, companies are required to disclose the volume of repurchase activity and average prices of repurchases in their annual reports.

Table 1.1 reveals that, in marked contrast to repurchase arrangements in the UK, there are few regulations and restrictions in the US.

Table 1.1 A summary of repurchase regulation in the ten largest repurchase markets around the world

Regulatory categories

CountryShareholder approval

Timing restriction

Price restriction

Volume restriction

Disclosure requirement

Insider trading

UK

US x x x x x x

Japan x

France

Germany x

Canada x

Italy x

Netherlands x

Switzerland

Hong Kong x

Notes:

and x indicate the presence and absence of regulation in each country for each individual regulatory category, although does not capture the exact nature of regulation.

Adapted from Kim et al. (2005).

Specifically in the US there are no restrictions on timing, volume or pricing levels at the time of repurchase programmes; company boards are in a position to take repurchase decisions without prior approval from investors; companies do not have to make any special disclosures



in relation to repurchase activity; and insiders can participate in the repurchase programme as shareholders. In comparison, regulation in the UK is more closely aligned to other major markets, although it is important to note that there are differences in the specificity and strictness of the regulations. In some instances, UK regulation is more stringent than that of other markets, and in others, it is less so. In the former case, for example, insiders in Canada may engage in trading activity when a repurchase is underway although the details need to be disclosed publicly. However, in relation to volume restrictions, in countries such as France and Italy, in addition to having controls on the allowable total volume of repurchases there are also restrictions on the daily level of repurchases. Similarly, for price restrictions, in France repurchases cannot be made at a price higher than the daily high.

Even though repurchase regulation in the UK is amongst the most stringent globally, the UK Shareholders’ Association (UKSA), an independent organisation representing the interests of private shareholders in the UK, is campaigning for further regulation (UKSA, 2002). While accepting the usefulness of share repurchases, the organisation is seeking further regulation to protect private shareholders whom, it believes, may be potentially disadvantaged. Its recommendations include: an explicit statement with each repurchase activity to explain exactly the reasons underlying the individual repurchase activity; identification and disclosure of any potential problems or risks that may arise with the repurchase; a justification of the use of repurchase programmes over all alternative distribution methods; confirmation that the repurchases are being used to benefit shareholders and not to enhance managerial self-interests; and finally an overview of repurchase activity in annual reports in which directors confirm the extent to which the repurchase objectives set have been achieved (UKSA, 2002).


11IntroduCtIon

The research questions

In the light of the recent surge in share repurchase activity in the UK, together with the markedly different regulatory environment within which programmes are enacted compared to the more highly researched US based environment, the primary objective of this study is to examine the motivations underlying, and factors influencing, the use of share repurchases by listed companies in the UK. Further the study also inquires into the views of the ‘recipients’ of share repurchase programmes, that is, investor groups. To this end, this study addresses four key research questions:

(i) what are the general motivations underlying, and the factors that influence, the use of share repurchase programmes;

(ii) what specific motivations and factors have driven actual repurchases in the UK in recent years;

(iii) what role has regulation surrounding repurchase activity in the UK played in shaping repurchase activity in UK companies; and

(iv) how do investor perspectives of share repurchase programmes compare to managerial perspectives?

Structure of the report

The remainder of the report is structured as follows. Chapter two presents a literature review of why companies may engage in share repurchase programmes. Chapter three presents the details of the survey approach employed in this project, and chapters four to six present the results of the survey. Specifically, chapters four and five examine repurchase activity in non-investment companies and investment companies respectively, while chapter six compares the views of investors,



the recipients of share repurchase programmes, with those of financial managers who are responsible for the repurchase enactments. Finally, chapter seven presents the conclusions.


2 literAture review

Introduction

Like any other financial activity, the principal aim of share repurchase programmes is to enhance the market values of companies and in turn the wealth of their shareholders. However, there may also be situations in which managers act in their own self interests at the expense of shareholders.

The seminal work of Miller and Modigliani (1961) on dividend irrelevance forms the basis for the motivations underlying the use of corporate share repurchase programmes. The authors showed that under conditions of perfect and complete markets, financial managers cannot alter the value of their companies by the way in which they distribute income to shareholders; rather managers need to invest in productive assets to enhance corporate market value. When the conditions of perfect and complete capital markets are relaxed to reflect real world situations, income distribution, and the approach to this distribution, may become significant ways in which to enhance corporate market value. Motivations for income distribution (regardless of the method of distribution) include:

(i) signalling future performance;

(ii) enabling more efficient capital structure and investment decisions;

(iii) managing principal-agent problems;

(iv) supporting efficient capital reallocation; and

(v) meeting shareholder expectations.



Motivations supporting share repurchase programmes specifically as a means of distribution include:

(i) signalling corporate undervaluation;

(ii) increasing gearing;

(iii) improving reported financial performance;

(iv) taxation reasons;

(v) accumulating shares for re-issue; and

(vi) managing takeover threats.

This chapter reviews each of the motivations in turn and presents the prior empirical evidence related to them.

Theoretical motivations underlying the use of share repurchase programmes

Motivations supporting income distribution

Income distributions using dividend payments and share repurchases are interchangeable and can be used either to complement each other or supplement each other.

Signalling future performance

A number of studies (Bhattacharya, 1979; Miller and Rock, 1985; John and Williams, 1985) have examined whether income distribution to shareholders is a signalling mechanism whereby companies manage the information asymmetry between managers and shareholders. Managers use regular dividend payments and/or share repurchases to indicate an improvement in future cash flows and earnings. Authors argue that regular income distribution represents a credible and a costly way with


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which successful companies can convey information to the markets to differentiate themselves from their less successful counterparts. Regular income distribution reflects the success of a company since it indicates its ability to make this payment into the foreseeable future, without recourse to external funds; managers are willing to commit themselves in advance to income distribution because they know that the improvement in future cash flows will serve to finance these distributions. At the same time, payments also serve as costly signals because this ensures that only the successful companies are able to afford this mechanism to convey the positive information to shareholders. This cost aspect of dividends has varied amongst different researchers. Miller and Rock (1985), for example, emphasised the costs associated with the investment opportunities forgone to make the payments to shareholders (or the extra costs of funding to pursue these opportunities). Bhattacharya (1979), on the other hand, proposed that income distribution is costly for companies because it requires them to generate sufficient cash on a permanent basis to support these payments.

Capital structure and investment decisions

Dividend policy, capital structure and investment decisions are key elements of financial management. Companies can adjust one of these three elements to influence and, in turn, optimise the other two. A flexible distribution policy serves to optimise companies’ investment decisions by enabling managers to retain income (for example, through lower payout levels) for future investment and in turn enhance company value. At the same time, a flexible distribution policy may also enhance a company’s capital structure (Megginson, 1997; Mitchell et al., 2001) by enabling companies to access external sources of debt because debt providers will be unlikely to be concerned with dividend payments/share repurchases if they do not represent a fixed expense that companies have to fulfil at regular intervals.



Managing principal-agent problems

Companies can use income distribution methods as mechanisms with which to manage the agency costs between shareholders and managers. In situations where companies have excess cash flow, managers may be tempted to use the cash flow to further their own self interests, at the expense of those of shareholders. Distribution policies that enable companies to deploy this excess cash flow therefore serve to prevent managerial self interest and protect shareholder wealth (Grullon and Ikenberry, 2000). Distribution policies also increase the need for companies to rely on external finance for future investments, and thus increase the monitoring of managers by these extra external stakeholders.

Efficient capital reallocation

Even in the absence of agency costs, in situations where companies have free cash flows with few investment opportunities, distribution programmes that return excess capital to investors are valuable in that they enable investors to reinvest their funds in alternative activities that generate a return higher than companies are able to achieve (Grullon and Ikenberry, 2000). Thus, in the absence of positive investment projects, companies may engage in dividend payments (special dividends) or share repurchase programmes to help enhance shareholder wealth.

Managing shareholder expectations

Shareholder expectations and preferences may also influence distribution policy. Depending upon their individual circumstances and expectations, shareholders or certain groups of shareholders may have a preference for income redistribution or income retention and also for specific types of distribution (see next section). In such instances, companies may feel compelled to respond to such shareholder requests.


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Situations underpinning shareholder views on distribution policies include individual shareholders’ circumstances, taxation policies and investors’ expectations. Shareholders may, for example, want regular dividends or repurchase programmes because of their heavy reliance on this income. Similarly, taxation regimes in which some distribution policies are more tax efficient than others will influence shareholder choices. Further, investors may believe that they are in a better position to make capital investments than the companies in which they have invested (Grullon and Ikenberry, 2000). A key consideration in relation to corporate shareholders is that, depending on the characteristics of individual shareholders and their circumstances, companies may face conflicting demands from different groups of investors.

Share repurchases as a method of income distribution

A number of motivations support income distribution specifically through share repurchases.

Signalling corporate undervaluation

When managers believe that the shares of their companies are undervalued (Ikenberry et al., 1995), they may engage in repurchase activity to signal market inefficiency and raise the share price. To the extent that the market believes that managers repurchase shares when they believe they are undervalued, repurchase programmes will be perceived as signalling this undervaluation and may result in an upward adjustment to the share price. In addition, to the extent that management can repurchase shares without volume or price restrictions, they can also influence and drive up the price of shares. Unlike dividend payments, share repurchases enable companies to address undervaluation directly by signalling undervaluation and influencing the share price.



The extent to which companies act on this motivation depends on the regulations surrounding repurchase activity. In countries such as the US, where there is very limited regulation, managers can readily engage in such practice. In countries such as the UK, however, repurchase regulation discourages managers from influencing and manipulating share price rises. For example, there are restrictions on the timing of repurchases, disallowing repurchases when information asymmetry is likely to be at its highest. Similarly there are restrictions on the volume of repurchases permitted and the prices at which shares can be purchased.

Increasing company gearing

Share repurchase programmes can also influence companies’ capital structures in a more direct manner. Share repurchases reduce the value of shares outstanding and therefore enable companies to increase their gearing ratios as desired. A company that believes it is under-geared can reduce its level of equity by repurchasing a proportion of its shares. To the extent that companies use long-term debt to finance their repurchase programmes, gearing ratios will adjust rapidly as levels of debt are increased and levels of equity are reduced.

Improving reported financial performance

A repurchase programme reduces the market capitalisation of a company and, in turn, increases a company’s earnings per share (EPS) (or prevents a decrease in EPS) as earnings are distributed across a smaller volume of shares. Thus, companies seeking a growth in their EPS, or attempting to prevent an EPS decrease, may repurchase a proportion of their shares. In countries such as the UK and the US, in which investors place more emphasis on the role of financial ratios including EPS than investors elsewhere, companies may be more inclined to use repurchase programmes to enhance their EPS. A similar argument


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holds for companies’ financial positions as depicted by their net asset backing (NAB) per share and dividend per share (DPS) (as long as the total dividend paid remains constant). Alternatively, companies have the opportunity to maintain the DPS and reduce the overall total dividend payment.

Academics such as Grullon and Ikenberry (2000) oppose the use of share repurchase programmes to influence companies’ EPS and market share prices. They argue that any positive market reaction should not be attributed to an increase in EPS, but rather to the impact of capital reallocation, where excess funds have been returned to investors to pursue a more effective investment strategy. The authors argue that the change in EPS indicates an improvement in a company’s productivity, but investors may recognise this change as an attempt at window dressing if there is no economic or financial basis for the improvement in productivity. In a similar vein, Yang and Young (2007) argue that the EPS cannot be the cause of better performance; rather repurchases serve to enhance company value by enabling companies to reduce their agency costs by returning free cash flows to investors.

Taxation

The gain on a share repurchase for an investor is taxed as a capital gain. Because dividends and capital gains are treated differently for taxation purposes in the UK, investors will have a preference for one over the other. Thus taxation policy may lead shareholders to prefer repurchases over other forms of distribution (or vice versa) and companies may feel compelled to respond to this preference.

Taxation, in many countries is traditionally used as a tool with which to discourage share repurchase activity. In the UK, for example, pension funds for a time received tax credits on dividend payments but did not on share repurchase programmes (Oswald and Young, 2004). However, there are currently no special taxation provisions that hinder or



promote the use of share repurchase programmes. Tax legislation in other countries has also been changed to make repurchases more acceptable and, indeed, encourage repurchase activity. Kim et al. (2005), for example, reported that new tax legislation in the Netherlands introduced in 2001 reduced the tax costs of share repurchase programmes and in turn enabled Dutch companies to participate in open market programmes.

Reissuing shares

Many companies offer share option schemes, bonuses, and retirement programmes to their employees. In the UK, companies were, until the end of 2003, unable to use share repurchase programmes for this purpose because they were required to cancel all shares immediately following a reacquisition. If share re-acquisitions were used to operationalise their stock option schemes, management had to set up wholly owned independent trusts that engaged in repurchase activity solely for this purpose and re-acquisitions in this case were not classified as share repurchases. Today, however, companies are able to hold repurchased shares as treasury shares and subsequently reissue them for this purpose.

Managing takeover threats

Companies can use share repurchase programmes to ward off potential take-overs (Vermaelen, 2006). There are two interrelated considerations. First, managers may make an attractive offer at which to reacquire a company’s shares and undermine the offer of an acquiring company. Second, to the extent that pessimistic investors will opt for repurchase programmes, the acquiring company may end up in a position of having to offer a higher price to the remaining shareholders in order to secure their support for the takeover.


21LIterature revIew

Other reasons for share repurchases

Additional motivations underlying share repurchase programmes include fads and fashions. The fashion may stem from their heightened use in the US and by larger UK companies. Moreover, share repurchase programmes enable companies to influence market liquidity, holding their shares back or supplying them to the market for resale. Finally, Mitchell et al. (2001) argue that share repurchase programmes may be more suitable in conditions of an economic downturn than during periods of high growth. One possible reason for such seasonality is that, to the extent that income distribution through share repurchase programmes is considered to be a one-off event, companies can afford to engage in such programmes during recessionary periods without over-committing themselves through measures such as rises in dividend payments.

Repurchases by investment companies

The previous section considered the motivations underlying the use of share repurchase programmes from the perspective of non-investment companies. This section examines the potential motivations underlying repurchases by investment companies. These companies, although listed on the stock exchange and having a fixed number of shares outstanding, differ significantly from non-investment companies in a number of their characteristics and as a result some of the motivations identified in the previous section may be of more or less relevance to investment companies.

An et al. (2007) note that investment companies, for legal reasons, do not hold significant amounts of surplus cash and hence repurchase programmes have to be funded either from the sale of investments or through long or short-term borrowing, thus reducing the significance of returning free cash flow.



Second, investment companies in the UK (and their US equivalents - closed end funds) are required to publish their Net Asset Values (NAV) (based on the market values of their investments) on a regular basis. This NAV represents the intrinsic value of the shares and hence, in contrast to non-investment companies there is, in effect, no information asymmetry between managers and investors regarding that value (Porter et al., 1999; An et al., 2007). Share repurchase programmes are not therefore perceived to signal any undervaluation for investment companies.

Third, in relation to the capital structure hypothesis, investment companies in the UK have a special tax status that prevents them from benefiting from tax relief on their interest payments and thus they are less likely to increase their gearing levels with share repurchases as a basis with which to enhance corporate value (An et al., 2007). Nevertheless, given that some investment companies choose to gear themselves, a change in the gearing levels may be a consideration for management.

Fourth, in order to qualify for approval as investment companies for tax purposes, investment companies in the UK must meet certain tests. Amongst these is the requirement that they must not retain more than 15% of their income from investments (ICTA 1988, S842) and must pay earnings to investors. This renders dividend substitution decisions as irrelevant to such companies.

Finally, with reference to improving reported financial performance where share repurchase programmes enhance corporate EPS levels, EPS levels have less relevance for investment companies which tend to focus more on NAV levels and discount to NAV as significant indicators of performance.

Some motivations, however, may be of greater concern to investment companies than to non-investment companies. First, where an investment company’s shares are trading at a discount to NAV, a repurchase programme should lead to an increase in share price because, provided the shares are repurchased at below the NAV, the programme will enable shareholders to ‘capture’ the discount (see for example Porter


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et al., 1999; Akhigbe et al., 2007; and An et al., 2007). The extent of the gain will depend on the proportion of shares repurchased and the level of the discount to NAV. If capital markets are efficient, any gain to be made should occur when the repurchase programme is announced, with actual repurchases following the announcement having no impact. However, it has been suggested that the market may not fully respond to a repurchase announcement when it is made if, for example, there is uncertainty about the commitment of the company to actually make the repurchases (Akhigbe et al., 2007) and thus there may be a longer term effect.

In addition to, and consequent upon, their impact on share prices, repurchase programmes will also impact on NAV and the discount to NAV, factors which, as noted above, are seen as significant indicators of performance. The announcement of a repurchase programme might be expected to increase the share price through discount capture, but will not immediately affect NAV; thus on announcement the discount to NAV might be expected to show a temporary increase. When repurchases are actually carried out, however, NAV for the remaining shares will increase, assuming that the shares are repurchased at below NAV (Porter et al., 1999; An et al., 2007). At the same time, in the absence of other effects, the increase in NAV when actual repurchases are completed will lead to the discount returning to its pre-announcement level. Hence the overall effect of the repurchase will be a permanent increase in NAV and a temporary increase in the discount suggesting that increasing NAV may be a motivation for investment company share repurchases. Further, investment companies may use share repurchases to reduce discount to NAV, for example, through an increase in demand; or, in the event that companies are unable or unwilling to reduce the levels of discounts, management may set a related but different target, that of maintaining a steady discount.

The balancing of the supply and demand for shares to influence market liquidity may also play a relevant role for investment companies.



Indeed this view has grown in perceived importance as institutional disinvestment in the sector has not been matched by increased retail demand. Porter et al. (1999), however, note that there are potentially two countervailing effects on liquidity resulting from share repurchases: a short-term increase due to increased demand at the time the repurchase is announced but a longer term decrease due to the reduction in the number of shares outstanding. In addition, An et al. (2007) noted that until 2003, any improvement in the liquidity of the shares of investment companies was likely to be temporary since the liquidity position could only be improved when repurchase programmes were enacted (by influencing demand levels) because companies were required to cancel shares repurchased immediately and were consequently unable to influence demand and supply levels and in turn liquidity over a longer time frame. However, since December 2003, listed companies have been allowed to hold shares in treasury for re-issue subject to stringent regulation and hence demand and supply management is a possible motivation for the period covered by this research.

Finally, An et al. (2007) proposed share repurchase programmes by investment companies may be used to signal a change in the character of the company a consequence of which is to improve the actual operating performance (NAV) of the company and in turn its share price. More specifically, the authors argue that repurchases signal increased director oversight of the fund manager and, by ensuring that fund size and management fees become conditional on fund performance, they improve fund management.

Prior empirical research

A number of studies have sought to explain the corporate use of, and motivations underlying share repurchase programmes. Reflecting conventional global repurchasing activity, a large proportion of these studies have examined the US market, although data from Australia,


25LIterature revIew

Canada and the UK have also been investigated. Prior research has primarily adopted a capital markets based approach, although surveys have also played a role in the US and Australia.

Capital markets-based research

The capital markets based studies, relying, principally, on publicly available information to assess corporate and investor behaviour, have generally sought to assess the extent to which they enhance shareholder value and examine specific reasons for these programmes, which may ultimately be responsible for the change in shareholder value. As is apparent from Table 2.1, in relation to the value enhancing properties of share repurchases, academic studies, regardless of the country of origin, have reported that the programmes result in significant positive market reactions post-announcement/enactment, although the extent of positive reaction reported has differed between studies. For example, Rao and Vermaelen (2002) examine UK repurchase activity and note a smaller abnormal return for shareholders than that for shareholders in the US.

In contrast, the practitioner based studies by Morgan Stanley have generated mixed findings. An earlier study reported in 2004 (Cooper, 2004) suggests that companies that announce buy-backs outperform the market by an average of 13% and up to 21% in the 12 months following the activity. A later study, covering a longer time frame, reversed these conclusions and reported an overall inferior performance of the share price by repurchasers compared to the market average: over the ten year period analysed, the share prices of the buyback companies rose by an average of 8.2% per annum, while those of the market and dividend paying companies rose by 10.3% and 12.7% respectively (Durrant, 2007; Hasell, 2007).



Table 2.1 A summary of prior capital markets-based research

Share repurchase explanations/motivations

AuthorInfluence

share priceSignalling(income)

Signalling(undervaluation)

Capital structure

North American context

Ikenberry et al., 1995 (US data) amongst others

Ikenberry et al., 2000 (Canadian data)

Jaganathan et al., 2000

Guay and Harford, 2000

Fama and French, 2001

Grullon and Michaely, 2002

Bens et al., 2003

Grullon and Michaely, 2004 x

Chan et al., 2004

Guffey and Schneider, 2004

Cooper, 20041

Hribar et al., 2006

Durrant, 2007; Hasell, 20071 x

UK context

Rau and Vermaelen, 2002 x

Oswald and Young, 2004

Espenlaub et al., 2006 x


1 Non-academic practitioner-based studies by Morgan StanleyBlanks the motives that were not examined by the papers cited √ / x refer respectively to studies that show support and fail to show support for the

repurchase motivations examined


27LIterature revIew

Table 2.1 A summary of prior capital markets based research (Cont.)

Share repurchase explanations/motivations

AuthorReturning free

cash flowsDividend

substitutionInfluencing EPS levels

Reducing tax

charges

North American Context

Ikenberry et al., 1995 (US data)

Ikenberry et al., 2000 (Canadian data)

Jaganathan et al., 2000 x

Guay and Harford, 2000 x

Fama and French, 2001 x


Bens et al., 2003


Chan et al., 2004 x

Guffey and Schneider, 2004

Cooper, 20041

Hribar et al., 2006

Durrant, 2007; Hasell, 20071

UK Context

Rau and Vermaelen, 2002

Oswald and Young, 2004 x

Espenlaub et al., 2006


1 Non-academic practitioner-based studies by Morgan Stanley

Blanks the motives that were not examined by the papers cited

√ / x refer respectively to studies that show support and fail to show support for the repurchase motivations examined



Addressing specific motivations and explanations, the results recorded in Table 2.1 reflect Chan et al.’s (2004) view that ‘taken together the literature provides a mixed understanding of the economic role of repurchases’ (p. 462). The empirical studies report consistent results in relation to the role of share repurchase programmes to influence corporate gearing levels (Chan et al., 2004; Guffey and Schneider, 2004) and reported EPS levels when the EPS level will otherwise fall short of analyst forecasts (Hribar et al., 2006) or experience a dilutive effect from new share issues for ESOPs (Bens et al., 2003). Such consensus is absent for all other motivations and explanations examined, which include the role of share repurchase programmes to: (i) return excess cash flows and in turn avoid the problems of overinvestment; (ii) signal management’s confidence in future earnings potential; (iii) signal undervaluation to the markets; (iv) reduce tax charges in the UK; and (v) replace traditional dividend payments.

In relation to the free cash flow motivation, Guffey and Schneider (2004), Grullon and Michaely (2004) and Espenlaub et al. (2006) all report that repurchasing companies exhibit higher levels of free cash flow, which are linked to the abnormal returns generated following the repurchase announcements. Chan et al. (2004), however, reported that the abnormal returns generated from repurchase programmes were not associated with free cash flows but were instead linked to decisions to change the companies’ gearing levels and signal managerial confidence in future income levels. Oswald and Young’s (2008) study based in the UK, which considered the free cash flow view specifically in the context of managing principal-agent problems, may serve to shed light on the differences in the results of earlier studies: the authors report that repurchase programmes appear to be linked to the distribution of free cash flow only in situations where agency costs associated with surplus cash are acute and not in companies in general.

With reference to signalling management confidence in future income, Grullon and Michaely (2004) and Espenlaub et al. (2006), refute Chan et al.’s (2004) results above since the repurchasing companies


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in their sample fail to exhibit improvements in future profitability; in fact they often exhibit a decline in future performance. In relation to signalling undervaluation, Ikenberry et al. (1995) and Ikenberry et al. (2000) support the motivation in a US and a Canadian context, respectively, by reporting that companies strategically trade their shares, buying a larger proportion of shares when the prices are low and fewer shares when prices are high. Rau and Vermaelen’s (2002) results in the UK context, however, fail to support the motivation, which the authors attribute to the stringent regulatory conditions which impose timing and volume restrictions on repurchase activity. Instead, the authors report that the form and intensity of repurchase activity is influenced by the tax regulations for pension funds, suggesting that corporate repurchase activity seeks to generate tax credits on behalf of shareholders. A later study by Oswald and Young (2004) based on more comprehensive data, however, reversed the findings of Rau and Vermaelen (2002) in relation to both the undervaluation and taxation motivations: like US and Canadian companies, UK companies also strategically trade their shares despite the regulatory requirements; repurchase activity, the authors note, is not driven by the desire to generate tax credits for pension funds.

In a separate series of studies, in relation to the role of share repurchase programmes to substitute dividend payments, Jaganathan et al. (2000), Guay and Harford (2000) and Fama and French (2001) all found that companies that paid dividends had more stable and more permanent income levels while those that used share repurchases had extraordinary transitory income. Managers, it appeared, were more likely to use dividend payments when they were confident of the permanency of an improvement in income. Share repurchases were more likely to be used when managers lacked confidence that any improvement in income would persist. Thus the two disbursement methods were employed to fit with different corporate circumstances. A subsequent study by Grullon and Michaely (2002), however, arrived at a different conclusion and reported that repurchases were gradually replacing dividends: companies funded their share repurchase programmes principally with funds that



would have otherwise been used to make dividend payments. They further reported that, although companies were unwilling to reduce their dividends to initiate share repurchase programmes, new payouts were more likely to be exercised through repurchases than dividends.

Overall, the academic results support the role of share repurchase programmes in enhancing corporate market value as reflected by positive market reactions. What is not confirmed, however, with the exception of influencing gearing levels and EPS levels, are the roles that the other motivations play in influencing corporate market value through repurchase activity.

Table 2.1 relates to capital market-based studies of non-investment companies. This section now turns to studies of investment companies. In the US context, Porter et al. (1999) and Akhigbe et al. (2007) examined share repurchases by closed-end funds, broadly equivalent to UK investment companies. Porter et al. (1999) found that the discount to NAV narrowed as expected when repurchases were actually enacted. However, they found no evidence that potential short or long-term liquidity effects impacted on the excess returns associated with repurchase announcements and concluded that ‘closed-end funds may repurchase shares because of the expected wealth gains for shareholders’ (p. 274). Akhigbe et al. (2007) found positive abnormal returns associated with repurchase announcements, supporting the view that such announcements are perceived as value-enhancing. Cross-sectional analysis also revealed more favourable valuation effects for funds with higher discounts to NAV and where a greater proportion of shares were covered by the announcement. Longer-term share price performance was tested by comparing buy and hold returns (BHR) for the repurchasing funds with those of matched non-repurchasing funds over a period of up to 3 years after the announcement. Repurchasing funds showed higher BHRs than the control group of funds with more favourable results for funds with a higher discount to NAV and lower liquidity. Their results suggest that the long-term effects are influenced by the extent to which repurchases were actually enacted.


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Finally, in the UK, An et al. (2007) examined evidence into the use of share repurchase programmes in investment trusts, reporting that shorter term gains were modest in nature and linked closely with a market-timing arbitrage, while the longer term gains were larger and apparent for both a share price rise and improved net asset value. The observable change linked to the improved operating performance, the authors argued, was a result of governance exercised by directors that signalled a shift in the distribution of power between directors and management.

Survey-based research

Mitchell and Robinson (1999) examined the motivations underlying share repurchase usage in Australian companies, following a period of legislative changes that made repurchase programmes more allowable. Analysing publicly cited motivations of 67 repurchase programmes, the authors reported that repurchase programmes were used principally to signal undervaluation and influence perceived low EPS. They also noted that different motivations were associated with different types of share repurchase programmes. In a later study, surveying managers’ motivations underlying the use of share repurchase programmes, Mitchell et al. (2001) confirmed the results of Mitchell and Robinson (1999): undervaluation and influencing companies’ EPS led repurchase activity and different types of programmes were used depending upon the motivation. In addition, the authors noted that repurchase programmes were not viewed as a substitute for dividend payments and that the conservatism evident in repurchase programmes in Australia was explained by the associated legal complexities with repurchase programmes, their relatively high costs, and a perceived negative attitude of investors towards such programmes.

Wansley et al. (1989) examined US financial managers’ views on the use of open market repurchases and tender offer repurchases and on the factors that influenced tender offer premiums. Survey respondents supported reasons of undervaluation and the distribution of free cash



flows but disagreed with the substitution hypothesis. Premiums paid for tender offers also supported the signalling view of repurchases with premium levels influenced by managers’ confidence in the future and the companies’ share price performance relative to the market. The authors also noted significant differences in managerial opinions based on the type of repurchases exercised, namely open market repurchases and tender offer repurchases. For example, while tender offer repurchasers believed that there were limited investment opportunities, open market repurchasers disagreed. The authors attributed the differences in results to the higher volume of shares sought and repurchased through tender offers than open market repurchases.

Baker et al. (2003) inquired into the use of repurchase programmes in US companies in the late 1990s. The authors reported that 90% of the respondent companies used open market repurchases, while the remainder used Dutch tender repurchases, target block repurchases and other forms of repurchases. Moreover, 71% of the companies financed their repurchases with available cash, 26% with short-term and long-term debt and 3% through other means. Results indicated that while undervaluation continued to receive strong support among the survey participants, capital structure had become a more important determinant of repurchases and the provision of shares for incentive schemes less important.

The Brav et al. (2005) study is the latest study to examine the role of share repurchase programmes in the US, as part of a broader study that also examined companies’ dividend policies. Results of the survey indicated that pay-out policies were considered only after the investment decisions and liquidity needs of the companies had been satisfied, unless this approach entailed a dividend cut, which managers were reluctant to pursue. Results indicated that, rather than increasing dividends, there was a trend amongst the sample respondents to repurchase shares as a way in which to return capital to investors. The way in which, and the purpose for which, dividend payments and repurchase programmes were


33LIterature revIew

used, however, differed. Specifically, repurchases were believed to be a more flexible form of payment, paid out of temporary income rises or when good investments were hard to find, while dividend payments were considered to be less flexible and therefore paid from permanent rises in income. Moreover, while dividend payments modestly supported the signalling, free cash flow and clientele hypotheses, repurchase programmes were used to signal undervaluation and managers were also very conscious of the effect of repurchase programmes on their EPS.

Summary

Prior theoretical research has developed an extensive list of motivations underpinning the use of share repurchases by investment and non-investment companies. Capital markets based research that has inquired into the motivations underlying share repurchase programmes has collectively produced inconclusive results as the findings of different studies have often been inconsistent. Survey based results in the US and Australia have tended to support the views that share repurchases are used when companies are undervalued and when they need to improve their financial performance (namely reported EPS levels). More recent survey evidence suggests that share repurchase programmes also are used to influence corporate gearing levels, although taxation and divided substitution appear to have little support. There has been a notable absence of similar studies in the UK. Research into investment companies in the UK (closed end trusts in the US) is also in its infancy and there has been a distinct absence of studies in the UK and elsewhere that have canvassed the views of corporate shareholders to ascertain their views about share repurchase programmes in influencing corporate market value.

The next chapter describes the methods employed to conduct the study and the characteristics of the respondent samples.


3 reseArch methods

Introduction

This chapter describes the methods adopted to undertake the study and summarises the characteristics of the respondent samples.

Research approach

The key method of inquiry for this study was a questionnaire survey. In an attempt to further understand investor perceptions of repurchase activity, an area that is currently under-researched, it was intended to supplement this with interviews with a small number of institutional investors. The purpose of these interviews, taking place after analysis of the results of the survey, was to attempt to illuminate further the findings of the survey. However, institutional investors proved reluctant to be interviewed, in part no doubt due to the unfortunate timing of the study during the current period of market turbulence. As a result it was possible to conduct only three interviews; these were with individuals occupying senior roles within the pension fund sector and the investment fund sector. Nevertheless the interviews provide some useful insights into investor perceptions of the repurchase process and comments from the interviewees are included in the analysis in the succeeding chapters.

the survey approach

Although the survey approach differs from much of the prior capital markets based research, it has become popular in finance research in recent years. Indeed finance researchers are beginning to argue that



it is important to augment the dominant markets based research with different empirical approaches to triangulate and validate the results of those quantitative studies (Tufano, 2001; and Graham and Harvey, 2001). The survey methodology complements the capital markets based approach by using a more direct way with which to understand how companies operate.

Two distinct questionnaires addressing issues about share repurchases were developed: one for the corporate community and one for the investor community. In each case, the questionnaires were modified to accommodate, respectively, the repurchasing and non-repurchasing groups amongst companies, and the institutional and private investors. In addition, the questionnaires for companies were tailored for ‘normal’ (i.e. non-investment) companies and for investment companies to reflect the different characteristics of the two types of organisations and in turn, the different motives underlying their use of repurchase programmes (Figure 3.1). In total six different versions of the questionnaire were prepared and dispatched to the target audiences: repurchasing non-investment companies; non-repurchasing non-investment companies; repurchasing investment companies; non-repurchasing investment companies; institutional investors; and finally, private investors.

Figure 3.1 A summary of the study participants

Target audience

Investment companies Non-investment companies

RepurchasersRepurchasers Non-repurchasers

Investor community

Private Institutional

Corporate community


37reSearCh MethodS

Sample selection

Repurchasers, for both non-investment companies and investment companies, were identified as those that had undertaken share repurchases between 2003 and 2007 inclusive. They were identified using the LSE website, on which all announcements of all repurchase programmes are recorded. In total 338 non-investment companies were identified as having used repurchases during this period. Of the 338 companies, four were deleted from the sample as they had head-offices in countries other than mainland UK and questionnaires to another nine were undeliverable for a variety of reasons including unavailable/incorrect addresses and mergers/delistings. Therefore, in total 325 questionnaires were delivered to the repurchaser companies.

To determine the sample of non-repurchasers for the non-investment companies, a matched sample based on the stock exchange sector in which the repurchaser companies operated and their size, in that order, was created. Anticipating a lower response rate with non-repurchasers, following the one to one match, an additional 66 companies were added to the list, to capture similar sectors and size as the repurchaser companies, to the extent possible. A total sample of 400 non-repurchasers was created although, of these, questionnaires to ten companies were undelivered for reasons aforementioned, leaving a delivered final sample of 390.

For the investment companies, from a total of 495 companies, 245 (49.5%) undertook repurchases during the period; the remaining 250 did not. All were considered for the study. From this initial list, two repurchasing investment companies and 13 non-repurchasing investment companies were omitted for reasons including the fact that the addresses were unavailable or non-deliverable and/or the company headquarters were not based in the UK. The final sample therefore comprised 243 repurchasing investment companies and 237 non-repurchasing investment companies.



Samples for the investor communities, namely the institutional investors and private shareholders, were generated from a number of different databases. The private shareholder list, made up of a sample of 400 shareholders, was randomly generated from the bulk shareholder list for one of the FTSE 100 companies, obtained from Companies House. A decision to target 400 private shareholders without a reminder (in place of 200 shareholders with a reminder) was made in anticipation of a relatively low response level to an original mail shot and a reminder. Five questionnaires were returned on the basis that the recipients no longer held shares in listed companies. The final private shareholder sample was therefore 395.

The institutional investor sample of 200 comprised four types of investors in order to capture diversity within the sample. The groups included investment trust companies (who as noted above are also frequent users of share repurchase programmes), unit trusts and open ended investment companies (OEICs), assurance companies and pension funds. The sample for investment trust companies was drawn at random from the investment company lists (for repurchasers and non-repurchasers) detailed above. That for unit trusts and OEICs was drawn from the financial express website that provides, inter alia, contact details for these organisations. The assurance company sample was determined from the FAME database, using a Standard Industry Classification (SIC) code for insurance companies and subsequently verifying the sample by ensuring that individual companies had substantial investments and were engaged in the assurance business. Finally, the pension fund sample was purchased from A. P. Information Services Ltd., a company that holds details of all UK pension funds; the pension fund sample comprised the top 50 funds by capital value. Four questionnaires were not deliverable to the respective organisations, and the final institutional investor sample was therefore 196.


39reSearCh MethodS

the questionnaire

A primary questionnaire, subsequently amended to suit the different audiences, was pilot-tested by practitioners and academics to ensure clarity, validity and appropriateness of the questions and questionnaire design, and adjustments were made to the final versions.

For the non-investment companies (both repurchasers and non-repurchasers) questionnaires were sent to finance directors (or company secretaries or chief executives in that order). To enhance the response rate, all questionnaires were, where possible, sent to a named individual.

In the absence of a finance director and company secretarial positions for the investment companies, questionnaires were addressed to the chairperson. Moreover, it proved difficult to access the names of these individuals as such details were not readily available on the parent company websites and thus letters were simply addressed to ‘The Chairperson’. However, it became apparent that often trusts managed by the same management company had the same chairperson. To encourage participation, while avoiding repetition of responses to the generalist sections, respondents were advised in the cover letter to complete one questionnaire in full, and to fill in section B2 that related to the specific user of repurchase programmes for the respective trust in the remainder.

Finally, questionnaires to private shareholders were addressed specifically to the share owners, while those to the institutional investors were addressed to named individuals where such information was available (for the pension funds and unit trusts) and to ‘The Primary Fund Manager’ in the absence of such information.

A postal approach was used to administer the questionnaires and respondents were sent a self-addressed freepost envelope. With the exception of the private shareholder group, respondents who failed to respond to the first request of participation were also sent a reminder to encourage participation.



Questionnaires for the corporate sector comprised five separate sections: a section on background information; two sections on corporate motivations; a section on the implications of the regulatory environment; and a section which invited additional comments from participants.

The background section covered the practical aspects of share repurchase programmes such as the manner in which programmes are financed, how shareholder approval is sought and how the repurchased shares are handled post-repurchase. The first of the two sections on corporate motivations sought to capture views as to why companies in general use share repurchase programmes; both repurchasing companies and non-repurchasing companies were asked for their views. The second section, which differed between repurchasing and non-repurchasing companies, was more specific in nature. For repurchasing companies it sought to capture the precise motives that had led them to use share repurchase programmes. For non-repurchasing companies, where the focus was on the likelihood of future use of repurchase programmes, this second section captured: (i) the likely factors which would drive repurchase activity in the event that the likelihood of future usage was high; and (ii) the reasons for non-use in the event that the likelihood of future usage was low. The fourth section, inquiring into the implications of the regulatory environment, captured the implications of the current context of repurchase activity and also the need for future changes in regulation. Finally, the fifth section enabled respondents to make any additional comments in relation to the area of study or the survey being undertaken.

All questions in the survey with the exception of the final section that allowed respondents to write freely were close-ended with respondents being given a choice of answers from which to choose. Close-ended questions, it was believed, would increase participation. For the sections that sought managerial opinions on corporate motivations and regulatory regimes, a series of statements pertaining to these topics were posed, and


41reSearCh MethodS

using a 5 point Likert scale respondents were requested to agree/disagree with the statements.

The investor questionnaire for both private and institutional investors comprised four sections: a background section covering basic information about the investors’ investment strategies and three additional sections that broadly mirrored sections two, four and five of the corporate questionnaire to enable comparison of results between managers and investors.

Questionnaire responses

Table 3.1 below summarises the response levels across the different sets of questionnaire dispatched.

Table 3.1 A summary of the response levels across the three different questionnaire audiences

Non-investment companiesUser companies

Non-user companies

Questionnaires dispatched 325 390

Response level 85 (26%) 44 (11%)

Useable questionnaires 66 (20%) 31 (8%)

Investment companiesUser companies

Non-user companies




Investors Institutional Private






As is apparent from Table 3.1, response levels from repurchasing companies were significantly higher than from non-repurchasing companies and response levels were also higher from the non-investment companies (for both repurchasers and non-repurchasers) compared to the investment companies. With both the investment companies and non-investment companies, however, not all respondents agreed to participate in the study; a small proportion responded to convey their decisions not to participate. The two most common reasons for non-participation were intense work commitments that precluded participation and company policy that disallowed managerial participation in external surveys, although on occasion no specific reasons were provided. A small number of private shareholders also wrote in to decline the opportunity to participate, and of these, some cited their lack of knowledge in the area as their reason for non-participation. There is therefore a potential for bias in these results as further detailed in chapter six.

Overall, the response rates for repurchasing and non-repurchasing non-investment companies were 26% and 11% respectively, and 15% and 9% for the investment companies. The response levels for both groups of repurchasers are comparable to prior research, and in anticipation of a poorer response for non-users, a larger sample size was employed, where possible. To test for bias, the descriptive characteristics of the early respondents and late respondents, that is participants who responded to the first survey request and the second request, respectively, were analysed using statistical tests. No statistically significant differences were found for the non-investment company sample or the investment company sample. Overall, the results reported in this report should be representative of the views of managers of quoted companies. In relation to the investor survey, the response level for private shareholders was surprisingly high (12%) especially when compared to that of institutional investors, of whom only 22 (11%) returned usable questionnaires.


43reSearCh MethodS

Summary

This chapter describes the survey and interview approaches employed to undertake the research, summarises the response levels amongst the different sub-groups and tests for respondent bias.

The next three chapters report the survey and interview results from the financial managers of investment and non-investment companies as well as private and institutional investors.


4 finAnciAl mAnAgers of non-investment compAnies

Introduction

This chapter presents the results of the questionnaire survey in relation to the views of financial managers from non-investment companies. The chapter commences with a description of the characteristics of the respondent companies and then considers the views of the respondents in relation to: (i) the general motivations underlying the use of share repurchase programmes by UK companies from both repurchasing and non-repurchasing companies; (ii) the specific motivations that have been responsible for the use of share repurchases by repurchasing companies and that may be responsible for those likely to initiate share repurchases in a sample of hitherto non-repurchasing companies; and (iii) regulation surrounding share repurchase activity in the UK.

Respondent characteristics

Of the 97 respondents, as reported in chapter three, 66 repurchased shares (repurchasers) in the period 2003 - 2007 (inclusive) and 31 did not (non-repurchasers). Table 4.1 summarises the basic financial and market characteristics of the two groups. Panel A of Table 4.1 presents three size measures: turnover, total assets and market capitalisation. The table reveals that, on average, repurchasing company respondents were larger than non-repurchasers across all three measures. This size difference is perhaps explained in terms of larger companies having access to more resources and therefore being better equipped to engage in repurchase programmes.



Panels B and C of Table 4.1 present the market characteristics and sector composition respectively of the repurchaser and non-repurchaser groups. As can be seen from the table, the majority of respondents in both cases were listed on the main market with 70% of repurchasers and 74% of non-repurchasers listed on that market. In addition, respondents came from 28 market sectors, six of which, media, real estate, support services, general retailers, software and computer services and travel and leisure each provided more than 5% of respondents, together accounting for over half the respondents.

Table 4.1 A summary of the respondents’ financial and market characteristics

Panel A Financial characteristics

All companies Repurchasers Non-repurchasers

Mean Max Min Mean Max Min Mean Max Min

£m £m £m £m £m £m £m £m £m

Turnover 5,415 178,525 0 7,302 178,525 5 1,314 16,221 0

Total assets 14,342 666,947 5 19,728 666,947 5 2,085 11,384 8

Market capitalisation 5,765 134,376 5 7,843 134,376 5 1,341 7,069 8

Panel B Market characteristicsAll companies Repurchasers Non-repurchasers

No % No % No %

Main market 69 71.1 46 69.7 23 74.2

AIM 28 28.9 20 30.3 8 25.8


47fInanCIaL ManagerS of non-InveStMent CoMpanIeS

Table 4.1 A summary of the respondents’ financial and market characteristics (Cont)

Panel C Industrial sectorAll companies Repurchasers Non-repurchasers

Sector No % No % No %

Automobiles & parts 1 1.0 0 0.0 1 3.2

Banks 2 2.1 2 3.0 0 0.0

Construction & materials 2 2.1 2 3.0 0 0.0

Electricity 3 3.1 1 1.5 2 6.5

Electronic & electrical equipment 3 3.1 3 4.5 0 0.0

Food & drug retailers 2 2.1 2 3.0 0 0.0

Food producers 3 3.1 2 3.0 1 3.2

Forestry & paper 1 1.0 1 1.5 0 0.0

Gas, water & multiutilities 3 3.1 1 1.5 2 6.5

General financial 4 4.1 4 6.1 0 0.0

General industrials 1 1.0 1 1.5 0 0.0

General retailers 8 8.2 5 7.6 3 9.7

Health care equipment & services 1 1.0 1 1.5 0 0.0

Household goods 4 4.1 2 3.0 2 6.5

Industrial engineering 3 3.1 3 4.5 0 0.0

Life insurance 1 1.0 1 1.5 0 0.0

Media 10 10.3 6 9.1 4 12.9

Mining 3 3.1 2 3.0 1 3.2

Nonlife insurance 2 2.1 1 1.5 1 3.2

Oil & gas producers 3 3.1 2 3.0 1 3.2

Personal goods 1 1.0 1 1.5 0 0.0

Pharmaceuticals & biotechnology 1 1.0 1 1.5 0 0.0

Real estate 10 10.3 6 9.1 4 12.9

Software & computer services 8 8.2 6 9.1 2 6.5

Support services 8 8.2 4 6.1 4 12.9

Technology hardware & equipment 2 2.0 2 3.0 0 0.0

Tobacco 1 1.0 1 1.0 0 0.0

Travel & leisure 6 6.2 3 4.5 3 9.7



Table 4.2 summarises the basic repurchase characteristics of repurchasers (Panel A) and non-repurchasers (Panel B), and also presents the views of the respondents (both repurchasers and non-repurchasers) in relation to the broad functioning of capital markets that may have influenced repurchase use (Panel C).

Table 4.2 Respondents: A summary of basic characteristics

Panel A Share repurchase users (n=66)

Methods of share repurchases %

Open market repurchases 94

Dutch tender offers -

Tender offers 6

Private arrangement 3

Method of financing share repurchases %

Existing cash balances 81

Long-term debt 21

Short-term debt 25

Management of shares repurchased %

Cancelled immediately 57

Held in treasury for resale 18

Held in treasury for re-issue 46

Operations surrounding repurchase programmes %

Existence of a formalised repurchase policy 34

Routine approval for programmes from shareholders 91

Use of external advisors 56

Panel B Share repurchase non-users (n=31)

Characteristics %

Prior use of share repurchases 10

Approval of share repurchases prior to 2003 48

Approval of share repurchases between 2003 and 2007 68



Table 4.2 Respondents: A summary of basic characteristics (Cont)

Panel C Users and non-users: market views (n=97)

Dividend payments versus share repurchases %

Percentage of respondents who rank share repurchases ahead of dividend payments as a method of surplus cash utilisation

54

Market efficiency

The extent to which capital markets are considered to be efficient, that is all historical and publicly available information is accurately reflected in the company’s share price (five point scale from always (5) to never (1))

Mean 3.27

Importance of the EPS

The level of importance you consider investors place on reported earnings per share (3 point scale from great importance (3) to no importance (1))

Mean2.51

Examining the operations of repurchase programmes, an analysis of the table reveals that open market repurchases were the most popular form of this activity; this method was used by over 90% of the participating companies. Tender offer repurchases and private arrangement repurchases were used only occasionally (6% and 3%, respectively) and none of the companies used Dutch tender offers, the more sophisticated version of fixed tender offers. The most popular method with which to finance the repurchase programmes was existing cash balances (81%) although, on occasion, companies also relied on short-term debt (25%) and even long-term debt (21%); these results closely mirror the findings on US companies recorded by Baker et al. (2003) in which 71% of the companies used existing cash balances and 26% employed debt to fund the repurchase of their shares. Following the re-acquisitions, while close to 60% of the companies cancelled the shares immediately, 64% held the shares in treasury either for reissue (46%) or for resale (18%) (some respondents cancelled some repurchased shares during the period but held others in treasury). Since the regulation surrounding the opportunity to hold shares was amended at the end of 2003, just over 60% of the sample had exercised this opportunity.



Despite the increasing popularity of share repurchase programmes, only one third of the companies surveyed had formalised repurchase policies. Most companies, however, sought approval from shareholders for their use as a matter of routine rather than to enable a specific repurchase programme, and slightly over half the companies employed external advisors to guide the repurchase programmes. In most cases, the latter position was occupied by company brokers and financial advisors to advise on market perceptions, although companies occasionally sought advice from legal experts to ensure compliance with the regulations of the stock exchange and the requirements of the Companies’ Act.

In relation to the non-repurchasing companies who participated in the survey, only three companies (10%) had repurchased shares prior to 2003. A much higher proportion, however, had sought approval to engage in repurchase programmes without actually subsequently enacting them, and there appeared to be a gradual rise in this practice over time: prior to 2003, 48% had sought approval to engage in repurchase programmes but by 2007 this had risen to 68%.

Finally, responses in relation to the broad functioning of the capital markets from both repurchasers and non-repurchasers were analysed. These indicated that: (i) a majority (54%) expressed a preference for share repurchase programmes over dividend payments in general terms; (ii) most believed the market to be efficient since the responses to this statement, on average, lay between the ‘sometimes’ (3) and ‘almost all of the time’ (4) options (yielding a mean score on a five point scale of 3.27); and (iii) investors were believed to place a significant level of importance on the earnings per share (EPS) ratio (a mean score of 2.51 out of 3).

Motivations for share repurchase programmes

This section discusses the results of the questionnaire sub-section that inquired into respondents’ views about the motivations underlying the use of share repurchase programmes in general terms. Using a Likert



scale where five indicated strongly agree and one strongly disagree, respondents were requested to state their views on a series of statements that looked at the different motivations underlying share repurchases. Table A, Appendix One, presents the results for each statement, including the percentages for agreement/disagreement levels (the strongly agree and agree, and strongly disagree and disagree have been combined, respectively) and the mean scores of the responses. The mean scores for each statement provide an indication of the aggregate or average response to the statements with means in excess of three indicating broad agreement (with higher scores indicating stronger agreement) whilst those below three indicate broad disagreement (with lower scores indicating stronger disagreement). These means were tested to see if they were statistically different from three (indicating no opinion) and the results of this analysis are reported in the discussion which follows. The statistical significance of differences between the views of managers of repurchasers and non-repurchasers were also analysed and are reported below.

Share repurchase programmes and share prices

In the belief that share repurchase programmes ultimately serve to improve shareholder value, respondents were asked about the relationship between the use of share repurchase programmes and share price rises. Interestingly, however, fewer than 40% of the respondents believed that share repurchase programmes themselves led to share price rises, generating a statistically insignificant mean of 3.13. There was, however, broad agreement that any price response to share repurchases was gradual, with 51% of respondents agreeing with this view (mean 3.23), rather than immediate where only 18% agreed (mean 2.57). Moreover, the proportion of respondents who believed that repurchase programmes increased share prices was very similar to the proportion that believed that announcements of intentions to repurchase shares increased share



prices (mean 3.18). Overall the results indicate that there is a divide between managers who believe that share repurchase programmes directly influence company value and those who believe that repurchases do not drive company value.

Within the constraints of a limited relationship between share repurchase programmes and share prices, the results reported in this section lend support to the longer term potential and role of share repurchase programmes and also highlight the role of announcements of repurchases vis a vis actual enactments. These results are perhaps unsurprising, particularly in the UK where open market repurchases dominate and there are tight restrictions on the volume of repurchases, which can thus play only a limited role at any one time.

Both repurchasers and non-repurchasers shared similar views in relation to the ability of actual share repurchases and announcements of intentions to repurchase shares to influence company value, but they differed on the longer term effects. Repurchasing companies on average tended to support the notion of a gradual, longer-term impact of share repurchases (63% agreeing and a mean score of 3.41) as compared to non-repurchasers who tended to disagree with this view (only 24% agreeing and a mean score of 2.83). The difference in these results perhaps helps to explain the diversity in company decisions to use or not use repurchase programmes.

repurchases versus dividends

Respondents did not think that repurchase programmes were a substitute for dividend payments or increases in dividends (disagreement levels of 91% and 79% respectively) but 67% agreed that they were a substitute for special dividends. One possible reason for this, as noted in statement four, was that they were considered to be a flexible means with which to return wealth to shareholders (85% agreement), rather



than the more rigid, fixed approach resulting with regular dividends (Dhanani, 2005).

Nevertheless, when asked to rank their preferences between dividend payments and share repurchase programmes in Table 4.2 over half of companies (54%) reported a preference for share repurchase programmes over dividend payments. The apparently inconsistent results may be explained in terms of the differing characteristics of share repurchases and dividend payments which: (i) do not make them interchangeable; and (ii) call for the use of share repurchase programmes over regular dividend payments. One such characteristic is the flexibility associated with share repurchase programmes over dividends: companies may be inclined to use share repurchase programmes in preference to dividend payments in the light of their flexibility in terms of the level of repayments, which is broadly absent with dividend payments. At the same time, share repurchases are unlikely to replace dividends as they each appear to fulfil different roles in corporate organisations.

Repurchasers were more inclined than non-repurchasers to agree that repurchase programmes offer a flexible means with which to return surplus cash to shareholders (statement 3) and that share repurchases are a suitable substitute for special dividends (statement 4). Nearly three quarters of repurchasers agreed with statement 3 compared to only half of non-repurchasers and over 90% of repurchasers agreed with statement 4 compared to 73% of non-repurchasers. Once again, these results may serve to explain why non-repurchasing companies do not use share repurchase programmes; they, or some of them, appear to have reservations about the flexibility of such programmes and rely more on alternative means such as special dividends with which to return surplus cash to shareholders.



Signalling undervaluation/future performance

Chapter two identified two potential attributes about which managers could use share repurchase programmes to send signals to the external markets and reduce information asymmetry: (i) to signal management’s confidence in future earnings/share prices; and (ii) to signal the intrinsic undervaluation of a company’s shares. Just over 60% of the respondent sample believed that share repurchases provided a valuable and useful signal of managements’ confidence in future earnings/share prices (statement 6) and a somewhat smaller proportion, approximately half the sample, affirmed their role as a signal of undervaluation (statement 5). The relatively smaller role of the undervaluation motivation is perhaps not surprising in the UK environment in which the timings of repurchase activity are restricted and thus opportunities to signal undervaluation reduced. In relation to statement 6 the context in which the signalling role was expected to materialise was not clear. Specifically, fewer than 20% of the respondents agreed with statements 7 and 8, which examined whether the repurchase programmes served to signal a permanent change in future income or a temporary one. Overall, the results for statements 6, 7, and 8 are unclear and call for further investigation. Finally, 42% of the respondents believed that announcements of share repurchases, with or instead of re-acquisitions themselves, were a source of publicity for the markets, although there was somewhat greater enthusiasm for this view amongst non-repurchasers (54% agreeing) than repurchasers (38% agreeing). Interestingly, the mixed views presented in relation to signalling were not explained by any statistically significant differences between the views of managers of repurchasers and non-repurchasers.


In relation to capital structure and investment decisions, there was a general consensus that companies made their share repurchase



decisions after they had taken their capital structure and investment decisions, although the slightly lower agreement level for the former may be explained in terms of the repurchase decisions themselves influencing capital structure outcomes. Specifically, just over half the sample respondents believed that share repurchase programmes are used to optimise companies’ gearing ratios.


The use of share repurchase programmes to return surplus cash to shareholders and thus prevent its misuse internally, generated a statistically insignificant mean. These results reflect a diversity of opinion amongst company managers: 40% of respondents supported this view, 29% disagreed and 32% were neutral. Overall, while the results in aggregate do not support the agency explanation, a sub-group of the respondents is supportive of this reason for share repurchases.


As already noted above, respondent companies believed that share repurchases were a flexible mechanism with which to return excess capital to investors. One reason for this is to allow investors the opportunity to reinvest their funds in activities that generate a return higher than that which the companies can achieve themselves, a view which attracted overwhelming support with 95% agreement. In other words, the survey results support the argument that share repurchase programmes facilitate the reallocation of capital; management exhibit behaviour to enable investors to maximise their wealth without necessarily doing so by seeking to improve the company’s own share price (as reported above). At the same time, the response to statement 18 (67% agreement) indicated that company shares would be repurchased if they offered the best investment opportunity at the time when making investment decisions. In other



words, within the framework of allocating capital efficiently, two-thirds of the managers considered investing in their own shares.

Stakeholder expectations

Managerial responses in relation to capital reallocation suggest that shareholder considerations are an important input into repurchase decisions and this, it could be argued, is inevitable since management have to seek shareholder approval prior to engaging in repurchase activity. The routine way in which this approval is sought, however, (as seen in Table 4.2) potentially weakens the role that the approval process plays in share repurchase programmes. However, management generally believe that shareholder views are an important consideration when reaching share repurchase decisions (83% agreement). There was also strong support for the view that both institutional (82%) and private (81%) shareholders benefited from share repurchase programmes, while brokers and advisors were on average also seen to benefit. How the benefits for investors accrue, that is whether the sellers or the non-sellers benefit from repurchases, is less clear, and this may in part reflect the high prominence of open market repurchases where sellers may not necessarily be aware that they are part of a share repurchase and equally non-sellers may not be aware that this opportunity to sell shares has arisen.

The involvement of brokers/advisors in initiating and/or encouraging share repurchase programmes and subsequently benefiting from them, as seen above, needs to be considered within a principal-agency framework, in which the experts may be tempted to further their own interests at the expense of shareholders. Managers, who may not benefit from the programmes themselves, need to carefully consider the advice to ensure that shareholder interests are ultimately protected.

Perhaps surprisingly, the non-repurchaser group took a stronger view on the importance of shareholder considerations (100% agreement) compared to the repurchaser group (74% agreement). These results



potentially suggest that shareholder views/requirements inhibit the use of repurchase programmes amongst the non-repurchaser companies. This view is explored in more detail later in this chapter.


The suggestion that share repurchase programmes enable companies to improve their EPS levels by reducing the number of shares across which the earnings are distributed was generally supported by the respondents: 76% of the respondents agreed that repurchase programmes are used in this capacity. Moreover, as reported in Table 4.2, most managers also believe that reported EPS levels are of significant importance to investors and hence the results in aggregate indicate that share repurchase programmes are used to influence reported EPS levels.

reissue considerations

The use of share repurchase programmes to create shares for reissue to schemes such as ESOPs and bonuses generated a mixed response: while 40% of the respondents believed that share repurchases are used for this reason, 32% disagreed and 29% voiced no opinion. The overall mean of 3.05 was not statistically significant. The diversity of response may in part be a result of the recent change in legislation in 2003 which allows companies to hold shares in treasury rather than cancel them immediately following a repurchase. As noted in Table 4.2, 36% of the repurchaser companies had not actually taken advantage of this opportunity. In addition, this, in part, relies on companies engaging in activities such as ESOPs and scrip dividends that introduce the need to hold and own shares for reissue.


A relatively small proportion of respondents agreed with the view that share repurchase programmes are used to ward off potential take-



overs (Vermaelen, 2006); in fact, 52% actively disagreed with this statement. These results are perhaps unsurprising in the light of the overwhelming use of open market share repurchases reported in Table 4.2; tender offer programmes are more appropriate for this purpose (Bagwell, 1991). Indeed the comparative unpopularity of tender offers compared to open market repurchases may well be a reflection of the fact that companies do not look at share repurchase programmes as a defence tactic for a take-over.

other reasons for repurchases

The growth in share repurchases is not generally seen as a response to a fashionable trend or to influence the market liquidity of shares. The latter result in the UK is perhaps unsurprising given the relatively low volume of shares that may be purchased together with the timing restrictions, which collectively render them unlikely to be able to significantly influence share demand and, in turn, liquidity. However, as chapter five explores, this motive may be a consideration for particular types of company, in particular investment companies, whose shares are less frequently traded.

Responses in relation to the impact of market conditions on the appropriateness of repurchasing shares generated a response of ‘no opinion’ from just over half of the respondents, although of the remainder who did express a view, twice as many respondents disagreed that share repurchases were more appropriate in falling markets. The variation in results observed together with the overall disagreement level (mean 2.70) may, in part, be explained by the fact that differing circumstances may make share repurchases attractive in both falling and rising markets. For example, during rising markets, investors may be willing to tolerate higher gearing levels, which may make repurchase programmes popular during such conditions. Conversely, during falling markets, managers may be more inclined to return cash to investors to enable them to invest it more efficiently and in this case, the programmes will be popular in



falling markets. Finally the role of share repurchases as a vehicle with which to influence the total level of dividends paid out or the overall DPS levels generated mixed views with 40% agreeing with the statement and 38% disagreeing with it, and a statistically insignificant mean level of 3.01.

Motivations underlying actual share repurchases

While the above section considered respondents’ views in relation to the use of share repurchase programmes in general terms, this section reports on results in relation to the motivations underlying actual repurchases by repurchasers and the likely motivations underlying possible repurchases in a sample of non-repurchasers who indicated a possible use of this approach in the short to medium-term future. Table 4.3 summarises the results. Comparisons between the results of repurchasing companies and non-repurchasing companies should be considered with caution as only nine non-repurchasing companies were in a position to complete this section of the questionnaire.

Most repurchasing companies identified multiple reasons for engaging in share repurchases and while the mode for the number of motivations was four, two companies identified more than eight reasons underlying their repurchase use. Amongst these companies, the opportunity to return excess cash to shareholders was by far the most frequent motivation, present in 73% of the 66 companies. This result perhaps serves to explain the change in the trend of share repurchase programmes in the current turbulent market plagued by a fall in profits and a lack of credit. First, companies may not have excess cash to return to investors, and second, even if they do have some spare capacity, they are likely to hold it as a valuable reserve in absence of the availability of external funds. Other reasons that follow include the need to improve the reported EPS level (49%); signal undervaluation of company shares (39%); and optimise the companies’ gearing ratios (36%). Further, just under one third of respondents (29%) cited that they used repurchase programmes in response to investor expectations; 27% as a flexible means of cash distribution to influence capital structure and



investment decisions; and 26% to influence company share price. All other motivations including the provision of shares for reissue and as a signal of an improvement in future performance were less prominent, present in under 25% of the cases canvassed.

Table 4.3 Motivations underlying actual share repurchases

Repurchasers (n = 66)

Non-repurchasers(n = 9)

Motivational factors % %

To return excess cash to investors 73 78

To improve the firm’s reported EPS 49 44

To signal undervaluation of the company’s shares to investors

39 44

To increase the firm’s gearing ratio 36 22

To respond to investor expectations 29 56

To facilitate capital structure and reinvestment decisions by introducing a flexible cash distribution mechanism

27 22

To increase share price 26 11

To invest in the best available investment opportunity at the time

20 22

To signal an expected improvement in future performance to investors

18 -

To provide shares for reissue 18 11

To respond to falling markets 9 -

To manage the perception that funds may otherwise be misused internally

6 11

To improve the liquidity of the shares in the market

6 -

To protect against a potential takeover 6 11

To replace dividend payments 3 11

To respond to market trends 2 -

Notes: This table captures the views of the repurchaser group and the nine companies from the non-repurchaser group who indicated that they were likely to use share repurchase programmes in the short to medium term future.



While some of the results reported in this section are consistent with the generalist views from both repurchaser and non-repurchaser groups reported in Table A, Appendix 1, others are somewhat surprising. Specifically, actual practices compared closely with generalist views in relation to: (i) capital reallocation; (ii) improving reported financial performance; (iii) shareholder considerations; and finally (iv) capital structure decisions. These motivations explain the limited support for the role of share repurchase programmes in increasing share price. Instead the overriding objective appears to be simply to return the wealth generated to shareholders, or prevent a decline in share value that may arise from failing to meet shareholder expectations. Alternatively, share repurchase programmes are not seen to have a direct association with share prices, but influence them through changes in such things as gearing levels.

Differences arose in relation to signalling undervaluation/future performance. Although respondents generally indicated greater support for signalling future performance than for signalling current undervaluation, in practice undervaluation played a more dominant role. In addition, although respondents in general supported the view that shares were repurchased when they represented the best possible investment, this was not one of the top five reasons behind actual repurchases.

Factors that were likely to influence a group of non-repurchasers to use share repurchase programmes followed broadly the same pattern as that for the user group with the opportunity to return excess cash to shareholders topping all motivations, followed by influencing EPS levels and signalling undervaluation to the market. Shareholder considerations also appeared to play an important role, essentially mirroring the non-repurchasers’ responses in Table A, Appendix One, where they expressed a stronger view in support of the relevance of shareholder considerations than their repurchaser counterparts. The two groups differed in relation to the role of repurchase programmes to optimise gearing levels with 36% of repurchasers citing this as motivating their repurchase of shares whilst only 22% of non-repurchasers indicated that it might motivate them to repurchase shares in the future.



Reasons for decisions not to participate in share repurchase programmes

It is apparent from Table 4.4, which records the reasons for the non-use of share repurchase programmes, that no one reason dominated respondent views. There was, however, a general consensus that a simple failure to consider repurchase programmes was not a reason - this was the only response to generate a statistically significant mean with a high level of disagreement with the statement. These results tie in with those reported in Table 4.2 in which just under 70% of the non-repurchasers had indicated that they had sought approval from shareholders to use repurchase programmes, although they had not actually enacted them. Amongst the reasons cited, 45% of the respondents explained that they were not in a position to use share repurchase programmes because they lacked the surplus financial facilities with which to do so and 43% explained that shareholder reaction to them was a cause for concern (although 52% did not share that concern). In comparison, only 24% of the respondents believed that the costs of share repurchases outweighed the benefits while 52% actually disagreed with such a view.

Table 4.4 Reasons for the decisions not to use share repurchases

Reasons for not using share repurchases Agree Disagree Mean

(n = 22) % %

We have simply not considered them 9 82 1.73

We do not have surplus financial facilities with which to enact them

45 45 +3.09

Any corporate benefits are outweighed by the costs/risks/administrative burden

24 52 +2.62

Our shareholders may view them negatively 43 52 +2.90

Notes: 1. This table reports the non-repurchasers’ views in relation to their reasons for not

using share repurchase programmes now or in the near future. The results tabulated include the percentage agreement and disagreement levels and the mean scores of the respondents based on a five point Likert scale where 1 is equivalent to strongly disagree, 5, strongly agree and 3, no opinion.

+ Indicates mean score statistically insignificant from the value of 3 (no opinion).



Overall, the results in this section indicate that non-repurchasing companies had generally considered the role of share repurchase programmes within their financial management practices and over 50% believed that they were a worthwhile consideration, with the benefits of the tools outweighing associated costs. However, the lack of fund availability and possible adverse shareholder response to repurchase decisions appeared to dictate the final decision not to use them.

Non-investment companies and regulation

Respondent views - both repurchasers and non-repurchasers - were sought in relation to the effect of existing regulations surrounding repurchase activity and the need for additional regulation to protect shareholder wealth. The results are shown in Table B, Appendix One. As mentioned in chapter two, UK share repurchase activity is guided by more stringent regulation than activity elsewhere such as the US and thus the question arises as to whether UK listed companies are disadvantaged compared with their counterparts elsewhere.

On the whole, respondents (66%) believed that existing regulation enhanced the credibility of share repurchase activity, although views in relation to whether the shareholder approval process educates shareholders about share repurchase programmes were mixed; with 44% agreeing and 56% expressing no opinion or actively disagreeing with the statement. An even more divergent view was apparent with the statement that inquired into the restrictive role of current regulation that places limits in the timing, volume and pricing of share repurchase programmes: 33% agreed with the statement, 36% disagreed with it and 32% were neutral - neither agreeing nor disagreeing.

Five additional statements inquired into the restrictive effects of individual regulatory requirements. Respondents did not believe that UK regulation curbed their repurchase activity and believed that the regulation sufficed and had not led to an overuse or under-use of share



repurchase programmes, and that there was no need for additional regulation to protect shareholder value.

There were some statistically significant differences between the views on regulation of repurchasers and non-repurchasers. Repurchasers on average disagreed more strongly than non-repurchasers with statements 3d and 3f, indicating that as might be expected they found regulation less inhibiting of repurchase activity than non-repurchasers. Also, as might be expected, repurchasers believed more strongly than non-repurchasers that existing regulations sufficed and there was no need for additional regulations to monitor managerial actions.

Summary

This chapter presents the results of the responses from the 97 non-investment companies who participated in the study. They indicate that repurchasing non-investment companies in the UK rely principally on open market share repurchases, generally financed by existing cash balances. Returning excess cash flows to shareholders appears to be the dominant motive for repurchase use. Other factors contributing to repurchase use include: influencing reported EPS levels; signalling undervaluation to capital markets; and optimising companies’ gearing ratios. Share repurchase programmes are not used in place of regular dividend payments and appear to arise from a different set of circumstances and situations. Moreover, they are not believed to be used in response to a new and emerging market trend or as a protection against potential takeovers, and surprisingly only 26% of companies use them to seek to increase their corporate share prices.

In relation to capital reallocation and signalling managements’ confidence in future income to the markets, while a significant proportion of respondents (both repurchasers and non-repurchasers) generally agreed with these two explanations, in practice, fewer than 25% of repurchasing companies were influenced by either of these.



Comparing the views of non-repurchasers with those of repurchasers, both groups have broadly similar perceptions: of the 33 statements posed only six generated significant differences between the two groups. These results suggest that corporate circumstances rather than managerial perceptions influence final decisions. In fact, adverse investor responses to repurchase activity, and the lack of finance to fund such arrangements, seem to prevent non-repurchasing companies from engaging in repurchase activity.

Finally, with reference to the unique regulatory environment in the UK where share repurchase activities take place within restricted guidelines, UK financial managers appear to be satisfied with the status quo. Indeed they believe that the regulation adds credibility to repurchase activity and enhances its role in the corporate arena.

The next chapter examines the views of financial managers of investment companies.


5 finAnciAl mAnAgers of investment compAnies

Introduction

This chapter reports the results of responses from the financial managers of investment companies. Motivations underlying the use of share repurchase programmes may differ between investment companies and non-investment companies owing to their differing characteristics.


As noted in chapter three, the respondent sample for this part of the survey was smaller (53 respondents) than that for the non-investment companies, possibly due the larger volume of non-investment companies surveyed.

Of the 53 respondents, as reported in chapter three, 32 repurchased shares in the period 2003 - 2007 (inclusive) and 21 did not. Table 5.1 summarises the basic financial characteristics of the two groups.

As is apparent from Panel A of Table 5.1, the mean market capitalisation of the total respondent sample was £107 million, although there was a large variation in individual company size ranging from zero to £1,077 million. As was the case with the non-investment companies discussed in chapter four, the repurchasing investment companies were marginally larger than the non-repurchasing investment companies (mean values of £110 million versus £102 million) although the difference was not statistically significant.



Table 5.1 A summary of the respondents’ financial & market characteristics

Panel A Financial characteristics

All companies(n = 53)


Non-repurchasers (n = 21)

mean max min mean max min mean max min

£m £m £m £m £m £m £m £m £m

Market capitalisation 107 1077 0 110 1077 10 102 535 0

Notes: The minimum value of £0 reflects the absence of a share price (and hence a market capitalisation) at 31/12/2007 for the smallest company in the sample. That company had a market capitalisation of £0.273 million at 30/11/2007 and £0.61 million at 31/7/2008.

Panel B Trust characteristics

All companies Repurchasers Non-repurchasers

No % No % No %

Venture capital trusts 19 36 14 44 5 24

Non-venture capital trusts 34 64 18 56 16 76

Nineteen of the respondents were Venture Capital Trusts (VCTs), a type of closed-ended fund which offers generous tax benefits to encourage investors to invest in venture capital (Table 5.1, Panel B). In order to obtain these tax benefits VCTs have to comply with regulations that are additional to those that govern ‘normal’ investment companies. In particular the majority of their investments must be in UK private companies or AIM quoted companies. A consequence of this is that it is more difficult to value the underlying portfolio; as a result VCTs tend to produce Net Asset Value figures less frequently than ‘normal’ investment companies. The VCT respondents showed a greater preponderance of repurchasers than non-VCT respondents, with 14 out 19 VCTs using share repurchases during the survey period compared to 18 out of 34 non-VCTs.


69fInanCIaL ManagerS of InveStMent CoMpanIeS

Table 5.2 summarises the basic repurchase characteristics of the repurchasing investment companies (Panel A) and non-repurchasing investment companies (Panel B). Panel C presents the views of both repurchasing and non-repurchasing respondents in relation to the broad functioning of capital markets that may have influenced repurchase use.

Table 5.2 Investment company respondents: A summary of basic characteristics

Panel A: Repurchasing investment companies (n =32)

Methods of share repurchases %

Open market repurchases 95Dutch tender offers -Tender offers 25Private arrangement -Method of financing share repurchasesSales of investments 85Long-term debt 5Short-term debt 20Management of shares repurchasedCancelled immediately 80Held in treasury for resale 35Held in treasury for re-issue 10Operations surrounding repurchase programmesExistence of a formalised repurchase policy 61Use of external advisors 65Routine approval for programmes from shareholders 100

Panel B: Non-repurchasing investment companies (n = 21) %

Prior use of share repurchases 19Approval of share repurchases prior to 2003 27

Approval of share repurchases between 2003 and 2007 86



Table 5.2 Investment company respondents: A summary of basic characteristics (Cont)

Panel C: All investment companies: market views (n = 53)

Reinvestment versus share repurchases %

Percentage of respondent who rank reinvestment ahead of share repurchases as a means of utilising surplus cash

90

Market efficiency MeanTo what extent are capital markets considered to be efficient, that is all historical and publicly available information is accurately reflected in the company’s share price (five point scale from always (5) to never (1))

3.45

Importance of Net Asset Value (NAV) MeanWhat level of importance do you consider investors place on NAV per share (3 point scale from great importance (3) to no importance (1))

2.81

Importance of Discount to Net Asset Value (NAV) MeanWhat level of importance do you consider investors place on discount to NAV per share (3 point scale from great importance (3) to no importance (1))

2.67

Panel A reveals that open market repurchases were the most popular means of completing repurchases; they were used by 95% of investment companies. A smaller number (25%) used tender offers; these were more popular amongst the investment companies, however, than their non-investment counterparts, where they were used by only 6% of respondents. None of the investment company respondents used either private arrangements or Dutch tenders during the survey period. Repurchases were mainly funded from sales of investments although, as with non-investment companies, a small number reported that repurchases were funded from short-term and long-term debt. The repurchased shares were cancelled by 80% of respondents and held in treasury by 45% of respondents (some respondents cancelled some repurchased shares during the period but held others in treasury). Investment companies thus made less use of the change in regulations than the non-investment companies of whom over 60% held at least some repurchased shares in treasury.



Compared to non-investment companies, a higher proportion of investment company respondents (61% v 34%) had formalised repurchase policies. All of the respondents sought approval from shareholders for their use as a matter of routine rather than on a need-to basis, and slightly under two thirds of the companies employed external advisors to guide the repurchase programmes. In both cases these results are marginally higher than those for the non-investment company respondents.

Turning to the non-repurchasing investment company respondents, only four companies (19%) had used repurchase programmes in the past (prior to 2003). Compared with non-investment company respondents, the proportion which had sought approval to repurchase their shares without subsequently enacting repurchases was much higher (86% compared to 68%) although it had been lower before 2003 (27% compared to 48%).

The survey responses reveal that investment companies’ views on market efficiency lay, on average between ‘sometimes’ and ‘almost all of the time’ with no statistically significant difference between repurchasers and non-repurchasers (Table 5.2, Panel C). Once again these views are broadly similar to those of the non-investment company respondents. Respondents believed that investors placed a great deal of importance on both NAV and the discount to NAV with mean scores of 2.81 and 2.67 (out of 3). These results are even more supportive of the view that key financial variables are important. Finally, 90% of respondents ranked reinvestment ahead of share repurchases as a means of using surplus cash.


This section considers the views of respondents about the motivations underlying share repurchases in general. Table A, Appendix Two, includes the agreement/disagreement levels and the mean scores based on both repurchasers and non-repurchasers (based on a five point



Likert scale in which 1 refers to strongly disagree, 5, strongly agree). It also highlights any statistically significant differences between the views of managers of repurchasing and non-repurchasing investment companies.


Table A, Appendix Two reveals that, on average, investment companies believed that share repurchases increased the share price (mean 3.29), with half of the respondents agreeing to the statement compared to just over one quarter who disagreed. The consensus view appeared to be that share prices responded to repurchases gradually (mean 3.34) rather than immediately (mean 2.63). However, there was little consensus on the impact of announcements of repurchases; while 34% agreed that they increased share prices, 32% disagreed and 34% were neutral. Considering differences in views between the repurchasing investment companies and the non-repurchasing investment companies, only statement four, regarding prices responding gradually to a repurchase, generated a statistically significant difference between the two groups. Non-repurchasing investment companies were on average neutral as to whether share prices responded gradually to share repurchases, with 30% agreeing and 35% disagreeing, yielding a statistically insignificant mean of 3.00. The typical repurchasers, on the other hand, agreed that share prices responded gradually (71% agreeing and only 5% disagreeing, yielding a mean of 3.67). In addition, a greater proportion of non-repurchasers (30%) than repurchasers (10%) believed that share prices respond immediately to a repurchase, although this difference was not statistically significant.

These views suggest only limited support amongst investment companies that it is announcements of repurchases rather than actual repurchases which lead to price gains. However, as discussed in chapter two, this greater emphasis on actual repurchases as opposed to announcements may be explained by uncertainty about the commitment



of the company to actually make the repurchases (Akhigbe et al., 2007). A further factor may be the fact that unless a trust is trading at a very high discount to NAV or repurchases a high proportion of its shares, the theoretical gains from discount capture will be small (and further reduced by transactions costs).

A comparison of the views of managers of investment companies with those of their non-investment counterparts reveals some differences between the two. Specifically, a greater proportion of investment companies (50% compared to 39%) believe that actual repurchases increase share price but a lower proportion (34% compared to 42%) believe that announcements of repurchases have that effect. However, the two groups agree that price changes in response to repurchases are gradual rather than immediate.

net asset value and discount management

When asked about the relationship between repurchases and both the NAV and discount to NAV, 93% of respondents agreed that repurchases enhance NAV. This view, although shared by both repurchasing and non-repurchasing investment companies, was held significantly more strongly by the former. This level of support is unsurprising, since if the shares are repurchased below NAV, such an enhancement is mathematically inevitable. There were lower levels of agreement on the impact of repurchases on discount to NAV with 49% of respondents agreeing that repurchases reduced any discount whilst slightly more (55%) agreed that repurchases reduced the volatility. These results suggest some support amongst investment companies for the use of repurchases to manage the discount to NAV.



Signalling future performance and corporate governance

The results in Table A, Appendix Two, show that respondents did not generally view repurchases as being a response to poor past performance, nor as a signal of improved future performance: with means of 2.17 and 2.05 respectively and disagreement levels of 76% in each case. Moreover, share repurchase programmes were not deemed to signal a lack of future growth opportunities; 66% of respondents disagreed with this statement, which generated a mean of 2.34. Finally, there was a general lack of consensus about the role of repurchase announcements in generating publicity in the markets. Some 32% agreed with this view, 34%, disagreed, and the mean response was a statistically insignificant 2.93.

Two statements regarding repurchases as a response to poor past performance and as a signal of lack of future growth opportunities, generated statistically significant differences in the mean scores between the repurchasing investment companies and the non-repurchasing investment companies. While both groups disagreed with these two statements, repurchasers held their negative views more strongly.

As noted in chapter two, repurchases may signal an improvement in corporate governance practices (through increased director oversight and increased independence of/from the fund managers), but the aggregate results in Table A, Appendix Two show little support for this view amongst respondents; they only attracted support from 24% of respondents and mean scores of 2.73 and 2.71 indicating that, on average, investment companies disagreed with both statements.

Finally, it is perhaps worth noting that the investment companies displayed a greater clarity in their views on signalling (generally hostile) than non-investment companies whose views as noted in chapter four are somewhat difficult to interpret.



Market liquidity and reissue considerations

Table A, Appendix Two reveals that investment companies on average supported the idea that share repurchases improve market liquidity and provide a useful means of managing supply and demand for the company’s shares; just over half agreed with the former statement and 73% agreed with the latter. Indeed, as is apparent from Table 5.2, 35% of repurchasing investment companies held shares in treasury for re-sale (as compared to 18% of repurchasing non-investment companies), indicating that a sub-group of management take additional measures to influence demand and supply levels. However, although investment companies appear to utilise share repurchase programmes to influence market liquidity, they do not consider such programmes as a method with which to generate shares for reissue - 66% of the respondents disagreed with this statement. These results are supported by the repurchasing investment company respondents; only 10% of these held shares in treasury for this purpose (as compared to 46% of repurchasing non-investment companies).

The views of managers of investment companies in relation to market liquidity also contrast with those of non-investment companies discussed in chapter four. Over 60% of non-investment companies disagreed with the view that repurchases improved liquidity whereas 56% of investment companies took the opposite view. One possible explanation for this, suggested by Interviewee B, was that repurchases might be perceived as having a more significant impact on liquidity for investment companies than for non-investment companies; investment company shares tend to be traded less frequently than those of non-investment companies, hence, repurchases might have a greater impact on liquidity for the former than for the latter.



Capital structure

As is apparent from Table A, Appendix Two, respondents’ views on capital structure reveal that investment companies did not in general see this as an important motive for repurchases. Only one respondent agreed that share repurchases are used to increase gearing ratios whilst over 63% disagreed. These results contrast with the views of managers of non-investment companies where over 50% agreed with a similar statement. The difference may reflect the absence of tax relief on debt interest for investment companies which as noted by An et al. (2007) makes gearing less attractive. Nevertheless, as mentioned in chapter two, some investment companies are geared and indeed as seen in Table 5.2, a proportion of investment companies sought to fund their repurchase programmes with debt. Moreover, the statement generated a statistically significant difference between the views of managers of repurchasing investment companies and non-repurchasing investment companies. While both groups shared their disagreement in relation to the role of share repurchases in influencing gearing ratios, repurchasing companies held stronger views on the issue.


A further contrast between the views of managers of investment companies and non-investment companies is revealed when the results of the two company types are compared in relation to capital reallocation. While close to 70% of the non-investment company respondents agreed with the view that shares are repurchased when they represent a better investment option than alternatives open to the company, there was a lack of consensus amongst the investment companies on this topic. Specifically, 39% agreed with the statement but 39% disagreed. While the mean of 2.85 suggests that, on average, investment companies disagree with this, the average score is not statistically significant and



probably reflects a wide disagreement between investment companies on the issue.


As noted previously, shareholder approval for share repurchases was sought by investment companies as a matter of routine rather than a specific need. Nevertheless, Table A, Appendix Two reveals that investment companies believed that shareholder views were an important consideration in relation to repurchases with 93% agreement and no respondent disagreeing. Shareholders were seen as the major beneficiaries of such programmes, and although both sellers and non-sellers were seen as benefiting from the programmes, sellers were seen as more likely to benefit. Brokers and advisors were also seen to benefit by 55% of respondents. Management was not seen as a beneficiary and nearly 70% of respondents disagreed with a statement that put this view forward; the mean was 2.33. Overall, the results are broadly in line with those expressed by non-investment companies (Table A, Appendix One). However, there are some differences such as the clearer view expressed by investment companies that management do not benefit from share repurchase programmes in comparison to non-investment companies who are broadly neutral on this question. This difference in results may well reflect the fact that, as noted by An et al. (2007), repurchase decisions in investment companies reduce the size of the investment fund and management fees tend to be based on size. Further, non-investment companies are ambivalent on whether sellers or non-sellers are the main beneficiaries from repurchases.


Table A, Appendix Two, reveals little support amongst investment companies for the view that other reasons explain share repurchases. Specifically, share repurchases are not seen as being popular just because



they are fashionable (63% disagreement) nor are they believed to be more appropriate in falling rather than rising markets (59% disagreement). These views are similar to the opinions expressed by non-investment companies (Table A, Appendix One).

Motivations underlying actual share repurchases

This section considers the specific motivations underlying the actual repurchases carried out by repurchasing respondents together with those identified as likely motivations by non-repurchasing companies who indicated that they might carry out repurchases in the short to medium-term future. Any comparison between the two groups must be treated with caution since the latter group includes only nine respondents.

Table 5.3 summarises the results and reveals that managing the discount, NAV and share liquidity considerations are the most important motivations for repurchases by investment companies. Specifically, 93% cite discount reduction and 70% highlight discount volatility as the key motives underlying their repurchase programmes, whilst 47% cite increasing NAV as a motive. Share liquidity considerations are also significant; 40% cite management of supply and demand for their shares and 30% highlight increasing the liquidity of their shares as specifically motivating their repurchase activity. The importance of investor views is also evidenced by the fact that 63% characterised their repurchases as being (at least in part) a response to investor expectations. Of the other specific motives identified, only increasing share price (20%) garnered much support whilst several, including signalling and gearing attracted no positive responses.

Turning to the non-repurchasing companies, a fairly similar pattern emerges: discount management, NAV and share liquidity considerations, and investor expectations all attract support whilst 5 out of 9 non-repurchasing investment companies cite increasing share price as likely to motivate them to initiate share repurchases. None of the remaining specific motives attracted any support.



Table 5.3 Motivations underlying actual share repurchases

Motivational factors

Repurchasers(n = 32)


% %

To reduce discount to NAV 93 78

To reduce the volatility of discount to NAV 70 44

To respond to investor expectations 63 44

To increase NAV per share 47 22

To better manage supply and demand for the company’s shares

40 78

To improve the liquidity of the shares in the market 30 33

To increase share price 20 55

To respond to market trends 10 0

To invest in the best available investment opportunity at the time

7 0

To signal an improvement in corporate governance 3 0

To signal an expected improvement in future performance to investors

0 0

To respond to poor past performance 0 0

To increase the firm’s gearing ratio 0 0

To provide shares for reissue 0 0

To respond to falling markets 0 0

Notes: This table captures the views of the repurchasing investment companies and the nine investment companies from the non-repurchasing group who indicated that they were likely to (and highly likely to) use share repurchase programmes in the short to medium term future.

Overall the results reported in this section are consistent with the generalist views reported earlier in this chapter. Share repurchase use in investment companies is dominated by the management of NAV and the share price discount which are specific to investment companies; market liquidity, which could apply to both investment companies and non-investment companies, was also important for investment companies in contrast to their non-investment counterparts where it did not play an important role.



Reasons for decisions not to participate in share repurchase programmes

Table 5.4 records the reasons for the non-use of share repurchase programmes amongst those investment companies which have not used them and which indicated that they were unlikely to do so in the short to medium-term future. All of these respondents appear to have considered repurchase programmes but have rejected them for a variety of reasons. Fifty eight per cent explained that they see no benefits from using them and 42% believe the costs of such programmes outweigh the benefits. In neither case, however, are the means statistically significant, indicating a large diversity in views. Finally, shareholder disapproval did not appear to be a concern with only 8% of respondents agreeing that shareholders might view repurchases negatively. Overall, in contrast to the non-investment companies, the reasons for the lack of use of share repurchase programmes in investment companies differ. Specifically, non-investment companies appear more concerned with shareholder disapproval and less concerned with the imbalance between their potential benefits and costs than are investment companies.

Table 5.4 Reasons for the decisions not to use share repurchases

Reasons for not using share repurchases (n = 12)

Agree Disagree Mean

% %

We have simply not considered them - 100 1.50

We see no potential benefits from using them 58 33 +3.17

Any corporate benefits are outweighed by the costs/risks/administrative burden 42 8 +3.42

Our shareholders may view them negatively 8 42 2.33

Notes: 1. This table reports the non-repurchasers’ views in relation to their reasons for not

using share repurchase programmes now or in the near future. The results tabulated include the percentage agreement and disagreement levels and the mean scores of the respondents based on a five point Likert scale where 1 is equivalent to strongly disagree, 5, strongly agree and 3, no opinion.

+ Indicates mean score statistically insignificant from the value of 3 (no opinion).



Investment companies and regulation

This section considers the investment companies’ views on the regulation of share repurchases as presented in Table B, Appendix Two. This table reveals that, on average, investment companies agreed that current regulation enhances the credibility of share repurchases (mean 3.61, 68% agreement). There was also support for the role of the shareholder approval process as an educational mechanism although to a lesser degree; 53% agreeing with this statement generating a statistically significant mean of 3.29. On average, investment companies did not agree that existing regulations restrict their repurchase activity. Further they did not see any need for additional regulation with close to 70% disagreeing that shareholders need more protection and that repurchases have spiralled out of control.

Overall these views are broadly similar to those of the non-investment companies discussed in chapter four, although the latter, in general, held these views more strongly than investment companies.

Summary

This chapter presents the results of the responses from the 53 investment companies who participated in the study. In common with their non-investment counterparts, repurchasing investment companies rely principally on open market share repurchases, although one quarter of investment companies also use tender offers. The main factors contributing to repurchase use appear to be managing NAV and discount to NAV which are specific to investment companies. Managing market liquidity which has a more general relevance to all companies was also regarded as important by investment companies. Other factors such as signalling and capital structure considerations appear to have played little or no role.



These results are consistent with the generalist views on the motives underlying share repurchases expressed by both repurchasing and non-repurchasing investment companies. In general, there appear to be few significant differences between the perceptions of the two groups, of the 27 statements seeking their views only four generated statistically significant differences between repurchasers and non-repurchasers. Moreover, in those cases, the differences reflected the fact that whilst repurchasers and non-repurchasers held the same views, repurchasers held them significantly more strongly.

In relation to the regulation of repurchase activity, managers of investment companies appear to be satisfied with the current position showing little appetite for further laws in this area.

Finally, comparing the views of managers of investment companies to those of non-investment companies reveals a number of differences. Investment companies are more likely to agree that repurchases increase share price than non-investment companies. They also, in contrast to non-investment companies, see share repurchases as a means of enhancing market liquidity. On the other hand, some reasons which attract support from the non-investment companies are rejected by investment companies, for example, capital reallocation and capital structure. These differences, for the most part, probably reflect the different characteristics of investment and non-investment companies alluded to in chapter two.

The next chapter reports the results of the investor survey and interviews with three institutional investors.


6the views of investors

Introduction

This chapter presents the results of the survey element that related specifically to the investor community, namely the institutional investors and the private investors. Following the structure of the questionnaire, the chapter commences with a description of the characteristics of the respondents and proceeds to consider the respondents’ views in relation to: (i) the general motivations underlying the use of share repurchase programmes in UK companies; and (ii) regulation surrounding share repurchase activity in the UK. Insights from the interviews are also presented where appropriate, although these views were obtained from only three participants and are therefore not generalisable.


Fifty seven usable questionnaires were received from the investor community: 18 from institutional investors and 39 from private investors. Table 6.1 summarises the basic characteristics of the two groups. In an attempt to capture a wider range of institutional investors, four different groups of investors were approached but as is apparent from Panel A of Table 6.1, none of the investment trust companies participated in the survey. Of the 18 respondents, 50% were pension funds, 39% trusts/open ended investment companies and 11% assurance companies. One possible reason for the lack of response from the investment trust companies is that the questionnaires were sent to a generic contact (for example ‘The Primary Investment Manager’) and not to named individuals so the covering letters were not personalised. In the light of



the relatively low response level from institutional investors, the results in this chapter, particularly those pertaining to institutional investors, should be viewed with caution.

In relation to the characteristics of the private investors (Panel B), 29% of the investors invested less than 10% of their savings in UK shares, 32% invested between 10 and 20% and 40% invested more than 20% of their savings in UK shares. A higher level of participation in the survey by investors with a higher proportion of their savings invested in company shares is perhaps unsurprising since these investors were more likely to be interested in topics related to investment and in turn the results of this study. Only 15% of the respondent investors stated that they relied on professional advice for their investment decisions, and only 15% stated that they were unaware of whether or not the companies that they invested in engaged in share repurchase programmes. Broadly these results indicate that the responding investors had some knowledge of share repurchase programmes. This view was indeed confirmed when just over half the respondents described their knowledge of share repurchase programmes as reasonable, and less than one quarter, ‘poor’. Once again, this tendency is perhaps unsurprising as only those investors with some knowledge of and interest in share repurchase programmes were likely to choose to participate in the study.


85the vIewS of InveStorS

Table 6.1 Investor respondents: characteristics

Panel A: Institutional investors

Type of Institution %

Pension fund 50

Life assurance 11

Investment trust company 0

Unit trust/Open-ended Investment Companies (OIECs) 39

Panel B: Private investors

Proportion of savings invested in UK shares %

Under 10% 29

10% - 20% 32

Over 20% 40

Do you use professional advisors when making investment decisions? %

Yes 15

No 85

Are you aware that companies in which you invest engage in share repurchase? %

Yes 85

No 15

Understanding of share repurchase programmes %

Very good 5

Good 21

Reasonable 54

Poor 21

Very Poor 0



Table 6.1 Investor respondents: characteristics (Cont.)

Panel C: Private and institutional investors

All Private Institutions

Objectives of investment in shares % % %

Regular dividend income 7 10 0Capital appreciation 49 54 39Both 35 33 39Other 9 3 22

Do you vote at general meetings? % % %

Yes in person 2 3 0Yes by Proxy 68 59 89No 30 39 11

Participation in repurchase approval process % % %

Yes 42 51 72No 58 49 28

Support for repurchases % % %

Always 28 27 31Sometimes 64 62 69Never 8 12 0

In terms of the investment objectives of the two samples (Panel C, Table 6.1), investors generally focused either on capital appreciation alone or a combination of a capital appreciation and dividend income; only a small minority of private investors were interested in dividend income alone. Unsurprisingly, a larger proportion of institutional investors in comparison to private investors voted at annual general meetings (AGMs) (89% versus 62%), and they were more likely to participate in the repurchase approval process (72% versus 51%) than their private counterparts. In both cases, investors appeared to be selective in their approval of share repurchase programmes, suggesting that the circumstances underpinning the programmes appeared to provide an important context. Nevertheless, Interviewee A commented that, in



his experience, the process of shareholder approval had become more a formality than a rational decision making exercise on the part of investors:

The resolution looks .. the same as last year and the year before and so… inertia sets in and you get very high levels of approval. … It’s a non-contentious resolution, shareholders have passed it in high majorities in the past and continue to do so. One reason for the continuation to do so is a complete blindness to what’s going on.

Interviewee C shed a different light on the situation stating that his fund generally approved the use of share repurchase programmes to provide management with an additional financial management tool, but at the same time it monitored repurchase activity to ensure that they were being used for valid reasons:

We nearly always approve the resolution …its not to say if we felt that a company was in a particular position and a share buyback was inappropriate, [although] we might have supported the resolution we would express our views that embarking on that programme may not be appropriate. .. we give them that flexibility to do a buyback and then should …it be inappropriate we’d certainly express our views.

As such the difference in perception between Interviewee A and the results of the survey may in part be explained by the view presented by Interviewee C that shareholder responses may generally be routine but that they are not necessarily a result of a ‘blind’ process.




This section and Table A, Appendix Three presents the results of the questionnaire sub-section that inquired into respondents’ views about the motivations underlying the use of share repurchase programmes in general terms; statements were closely aligned to those in the questionnaire sent to non-investment companies to enable a comparison between the views of investors with those of financial managers.


When investors were asked about the relationship between the use of share repurchase programmes and share price rises, they generated response patterns similar to those of financial managers. Specifically, like financial managers, investors viewed share repurchase programmes as leading to a share price rise, although the mean of 3.17 was statistically insignificant and only 41% of investors actually supported this view. Investors, like managers, generally believed that any price response to a repurchase was not immediate but likely to be gradual taking place over a relatively lengthy period. Moreover, just as financial managers, the proportion of investors who believed that repurchase programmes led to share price rises was similar to the proportion who believed that announcements of intentions to repurchase shares were an important factor contributing to such a rise.

Overall, the results indicate that investor views were closely aligned to those of managers, with a divide between investors who believe that share repurchase programmes directly influence company value and those who believe that repurchases do not drive company value. Moreover, investors lent support to the longer-term potential of share repurchase programmes but generally gave only limited support to the role of announcements of repurchases as compared to actual enactments.



One area of concern, as Interviewee A explained, was the possible overuse of such programmes which in turn rendered them ineffective:

More of the use to me is the abuse as most of the use is poor, it’s poor performance, [the] poor use of capital… [Repurchases] are a tool I’d expect them [companies] to have ... its how they use it … There are some companies that do use share buy-backs selectively and effectively ... I’d say it’s an 80:20 split: bad 80% of the times and good the [remaining] 20%.

Indeed this interviewee’s view may serve to explain the diversity in the views amongst the investors surveyed in that he explained that while some investors may, from their experiences, be more critical about the roles of share repurchase programmes, others may implicitly consider share repurchase programmes to add value because ‘they naively think that share repurchase programmes have to be positive [and] so they’re the thing to support’ (Interviewee A).

Moreover, Interviewee C explained that the link between a share repurchase programme and company value is not a direct one but that the relationship relies on managerial intentions and market perceptions of these intentions. Thus, in the absence of these factors the relationship may not necessarily materialise. Couching the relationship between share repurchase programmes and company value in the context of influencing gearing, he explained:

Over time if they’re [share repurchases] used appropriately and where the market feels [that] the debt to equity ratio is about right, that’s where it can help to maximise firm value.

On comparing the differences in responses between private investors and institutional investors, it becomes apparent that institutional investors were much less convinced that share repurchase programmes



led to a share price rise than their private investor counterparts (28% of institutional investors agreed compared to 47% of private investors who supported the statement with mean scores of 2.78 and 3.36, respectively). While the small number of institutional responses may be responsible for this discrepancy (and the mean of 2.78 is not statistically different from 3 - no opinion), the survey results, together with insights from the interviews, suggest that institutional investor scepticism was prevalent in relation to several other areas relating to share repurchase activity.

Addressing the difference between non-investment companies and investment companies, an additional consideration that Interviewees A and B raised was that share repurchase programmes seemed a more natural tool for investment companies:

For investment companies … the discount to NAV... is an example of the company taking a fairly sensible approach from first principles. (Interviewee A)

I am less convinced that share buy-backs in a non-investment company arena can demonstrably add value for shareholders on an on-going basis. (Interviewee B)

repurchases versus dividends

Investor views in relation to dividend substitution broadly mirrored those of financial managers, although there was a distinct variation in the strength of the views expressed. Specifically, investors, like financial managers, did not see share repurchase programmes as a substitute for regular dividend payments or a substitute for increases in such payments with 60% and 54% disagreeing respectively. However, their views were less extreme than those of financial managers (mean scores of 2.45 versus 1.71 for statement 1 and 2.74 versus 2.08 for statement 2). Private shareholders, who appeared to assume fairly neutral positions, were,



however, responsible for the less extreme views; the views of institutional investors, as confirmed by Interviewee A, were much more closely aligned to those of financial managers:

Markets exaggerate their response when you’re cutting a dividend or passing on it completely. With share buy-backs, although they’ve become an annual event in terms of shareholder approval, they seem to be used in a less regular, consistent, recurring, stable trend kind of way.

In addition, while investors in aggregate leaned towards the view that share repurchases are a substitute for special dividends (52% agreeing, generating a mean of 3.22), their views, unlike those of financial managers (3.59 with 67% agreeing), were not statistically significant. Finally, while both investors and financial managers agreed that share repurchases offer a flexible means with which to return wealth to shareholders, managers expressed stronger views on this topic than investors (mean scores of 4.05 and 3.43, respectively). The difference between the managerial and investor views, it would appear, was partly driven by private investors’ responses.

Overall, both managers and investors refuted the substitution effect in relation to regular dividend payments, although managers believed repurchase programmes to be a flexible means with which to return surplus cash to investors and to be broadly akin to special dividends; a sub-group of investors, however, had reservations about the role of share repurchases in this capacity. The somewhat different views between management and investors in relation to the flexibility and substitutability of share repurchase programmes can be explained by the characteristics of these programmes, as highlighted by two of the three interviewees; Interviewee C expressed an indifference between share repurchase programmes and special dividends from his company’s perspective, although he recognised there could be a difference for private investors. Interviewees A and B explained that special dividends are



more equitable and represent a more certain distribution of resources to investors in comparison to share repurchase programmes in which only the sellers receive the rewards and there is little certainty associated with these gains. This situation is further compounded by the use of open market share repurchase programmes in which the surplus cash distribution cannot generally be anticipated by investors or signalled by management.

I’d rather like to see more special dividends … I’d like to see them set that [repurchase] option against paying a special dividend or another form of distribution. (Interviewee A)

It’s [share repurchase activity] probably a means of actually drip-feeding excess cash that companies have in relatively small measure back to shareholders, but I really think it’s not equitable because not all shareholders have a facility to access a share buyback whereas a more equitable treatment would be to return that capital to all shareholders or give all shareholders a right to receive that. Now you can do it by dividends, by a special dividend, you could undertake a tender offer, you could even have a general capital distribution by which a company issuing B shares, which are subsequently redeemed at a certain value. (Interviewee B)

At the same time, the ‘drip-feed’ approach as described by Interviewee B, offers management more flexibility than special dividends since management do not have to commit themselves to a set sum and have the opportunity to deviate from the intended repurchase value and also time their repurchases to suit the business cash flow cycles.



Signalling undervaluation/future performance

Forty-seven percent of investors believed that share repurchase programmes serve to signal undervaluation of a company’s shares while 52% of investors view share repurchases as an indicator of management’s confidence in future earnings/share prices to the external markets. As with managerial views on these topics, there was marginally higher support for the latter than the former.

Interestingly, Interviewee B also explained that when share repurchases take place following price decline (theoretically to signal undervaluation), for investors who believe that the shares are actually fairly priced, the repurchases signal a weakening of future prospects rather than an improvement since share prices are forward looking indicators:

Probably most of the share buy-backs are undertaken because share prices have fallen. Given that share prices tend to be forward looking indicators it may well be that share price has fallen because the company’s prospects are deteriorating in the views of the market rather than improving … I think you’ll probably find that buy-backs are undertaken under situations of shall we call it distress of various degrees rather than in anticipation of a dramatic improvement in business prospects.

Amongst the survey respondents, however, this was a minority view and only 19% disagreed that repurchase programmes signal management confidence to the markets.

Amongst those who agreed that share repurchases signal future income capacity to markets, a larger proportion of investors (33%) believed that share repurchases signalled a transient rise in future earnings, than a more permanent rise (17%). Finally, in contrast to the views of the financial managers who took a neutral stance on the issue (mean score of 3.09), investors generally agreed that repurchase announcements served to generate publicity in the markets with some



57% agreeing that this was the case, resulting in a mean score of 3.48. In other words, while managers did not consider announcements to capture investor attention, investors actually took note of such announcements.

In terms of differences between private and institutional investors, there was only one statistically significant difference and this related to the nature of the signal in relation to future income changes. While both sets of investors agreed that share repurchases did not generally signal a permanent rise in income, institutional investors’ views on this matter were more extreme.


Investors broadly supported managerial views that companies arrive at their share repurchase decisions after they have made their capital structure and investment decisions; however, their level of support for this argument fell short of that of managers (mean of 3.49 versus 3.86 for the former and 3.54 versus 3.98 for the latter). In addition, the reported mean score for the statement that inquired into the influence of repurchase programmes on corporate gearing levels although positive, indicated that, on average, agreement was lower than that recorded for managers. Reflecting a ‘no opinion’ view from a significant proportion of private investors, these results indicate that private investors were not convinced about the role of share repurchase programmes in shaping corporate balance sheets.


The statement relating to the agency cost explanation generated one of the higher means (3.62) from the investor community, indicating that investors in general agreed that share repurchases serve to manage agency considerations by returning surplus cash to shareholders. Sixty percent of investors overall took this view and support was particularly



strong amongst institutional investors (89% agreement). This contrasts with views of financial managers who took a broadly neutral view of this statement (mean score of 3.15) with only 40% agreeing. The lower managerial support is perhaps unsurprising since management otherwise implicitly indicate the presence of principal-agency problems.

Interestingly, together with share repurchase programmes serving to alleviate principal agency considerations, as seen later in this chapter, investors believed such tools to serve managerial interests at the expense of investors.


Capital reallocation suggests that share repurchases enable companies to return surplus cash to investors when there is an absence of value enhancing investment opportunities and allow investors to re-invest their funds in investments of their choice. Moreover, companies may be inclined to invest in their own shares, if they deem this to be the best available investment opportunity at the time. Like financial managers, as noted in chapter four, the investor community also agreed with these two views with greater support for the former; Interviewee C commented:

The other hypothesis that it [share repurchase programme] signals is... we haven’t got a better way of investing our excess cash and we are returning it to you as shareholders, and that gives us the opportunity to make investment decisions and we certainly buy that...

For both statements, however the level of support provided by investors was somewhat weaker than that provided by managers. This in part stemmed from a lower agreement level from the private shareholders, who were, in general, also considered to be the subsidiary beneficiaries of the redistribution process.




In relation to stakeholder considerations, although investors believed that shareholder views/requirements were an important consideration when reaching share repurchase decisions with 65% agreeing and a mean of 3.65, they held this view less strongly than corporate managers where 83% agreed with a mean of 3.95. In addition, both private and institutional investors believed that the latter were the more significant beneficiaries of share repurchase programmes (mean 3.87) than private shareholders (mean 3.27). One possible reason for this, as two interviewees explained, was that large institutional investors were likely to have closer working relationships with companies and, in turn, more insight and also more influence on the specific details of such exercises. As noted earlier, Interviewee C commented that his organisation would consult with companies about their use/misuse of share repurchases.

Comparing the relative benefits to private shareholders, management and advisors, more investors viewed management (65%) and bankers/advisors (62%) as beneficiaries from such programmes than private investors. These results contradict those of managers and highlight the presence of principal agency considerations recorded in chapter four. Indeed all three interviewees commented that one potential area for managerial benefits lay in relation to their reward structures, which if linked to market movements on EPS, would encourage the use of share repurchase programmes. Even though Interviewee C commented that his firm would attempt to discount the EPS level to eliminate the effect of the repurchase on the EPS level to determine the ‘true’ EPS level to accommodate such manipulation, benefits to managers would continue.

The possible benefits of share repurchase schemes to brokers and advisors generated mixed views amongst the three interviewees. Interviewee A explained that this stakeholder group benefited from commissions and fees and were also responsible for heavily promoting the use of share repurchase programmes to companies. Interviewee B,



on the other hand, explained that from his experience as a user of share repurchase programmes, commission charges were minimal, outstripped substantially by other costs such as stamp duty. Interviewee C agreed with Interviewee A but commented that while bankers and advisors were likely to promote the use of share repurchase programmes to fulfil their own interests, ‘it is incumbent on the directors to manage the company with their fiduciary hat on’, and that while banks and advisors were a likely catalyst in repurchase activity, both management and investors, who are also known to encourage repurchase activity, need to accept responsibility.

Investors believed that sellers of repurchase programmes were more likely to benefit from share repurchase programmes than non-sellers who continued to retain company shares. These results tie in with the view that repurchase programmes do not necessarily have share value implications, and also the recurrent view that sellers benefit from the redistribution process. Nevertheless, they are inconsistent with the views of managers who believed that both sellers and non-sellers benefited from such programmes.

Finally, in terms of differences between private and institutional investors, there were two statistically significant differences, which related to signalling future income changes to the markets. One, private investors were more positive about the role of share repurchases in signalling future income, while institutional investors on average had no opinion, and two, while both sets of investors agreed that share repurchases did not generally signal a permanent rise in income, institutional investors’ views on this were more extreme.


While investors expressed support that share repurchase programmes are used by companies to influence reported EPS levels, the level of support generated was weaker than that expressed by companies



themselves. Specifically, while 76% of managers agreed with this statement, only 54% of investors agreed with it and the means recorded for the two groups were 3.83 and 3.33, respectively. These results may, however, be explained by Interviewee B’s view that the influence of share repurchase programmes on reported EPS are likely to be marginal with other factors playing a far greater role. The restrictive limits on the volume and timing of share repurchase programmes in the UK perhaps contribute to this marginal effect. Nevertheless, as all three interviewees had indicated, the role of share repurchase programmes where managerial reward structures were linked with reported EPS levels were noteworthy, and monitored by investors. In these situations the EPS levels were discounted to accommodate the impact of repurchase activity.

reissue considerations

Thirty nine percent of investors agreed that share repurchases are used to generate shares for re-issue, broadly the same proportion as for financial managers, although the mean score of 3.24 is higher than that for managers. A slightly higher proportion, 44%, was neutral, while only 17% disagreed. This contrasts with the managers where some 32% disagreed suggesting greater diversity of opinion within the manager group than within the investor cohort.


In contrast to the view held by managers that share repurchase programmes do little to ward off potential take-overs (Vermaelen, 2006), a significant percentage of investors (49%) believed that the programmes can be utilised in this way. This view was, however, primarily driven by the views of private shareholders who positively agreed with this statement; in fact, institutional investors disagreed with it.




Interviewee A’s strong view that:

Share buy backs have become such a commonality... people are not even thinking if it’s a good thing or a bad thing...

...was shared by over 40% of the survey respondents who on average agreed that the rise of share repurchase programmes is a result of a trend. Interviewee C, however, also noted that while companies were largely responsible for enacting repurchase programmes, the investor community also played an important role in influencing and encouraging managerial behaviour. Further, he added that repurchase activity was indeed a fad during the boom period that was likely to fade away during the bad times.

Moreover, unlike managers, investors broadly believed that share repurchases served to improve the market liquidity of the shares, although the mean score was statistically insignificant and views were spread across all three possibilities (agree/disagree and no opinion). This in part reflects diversity in views between private investors and institutional investors with the former highlighting positive liquidity effects whilst the latter disagreed with that view. Interestingly, the views of private investors seem more in line with those of investment companies discussed in chapter five, although as noted in that chapter their support for positive liquidity effects may reflect the specific characteristics of their companies.

Finally, there was some disagreement between managers and investors in relation to the role of share repurchase programmes: (i) in rising/falling markets; and (ii) influencing future payout levels. Specifically, a significant proportion of both managers and investors voiced no strong opinion in relation to the relevance of market conditions, although of those who did, investors more frequently agreed that share repurchases are more appropriate in falling rather than rising markets, and managers more frequently disagreed with this. The wide diversity in results for both



managers and investors, and the high levels of ‘no opinion’ are perhaps explained by a variety of different situations that materialise in particular market conditions. Mitchell et al. (2001) explain that share repurchase programmes may gain popularity in downward markets as companies may be reluctant to distribute cash dividends which, subsequently, may have to be reduced. In contrast to this proposition, Interviewee C explained that poor market conditions (the credit crunch at the time of the interview) were likely to curb repurchase activity since this could be seen as preferable to reductions in cash dividends. Moreover, he explained that markets would be less willing to accept increases in gearing levels associated with repurchase activity in such market conditions thus again driving down repurchase activity.

Furthermore, Interviewee B explained that alongside market conditions, there are a number of company specific conditions that are also relevant. Specifically, he made a case for share repurchase programmes in situations of deteriorating company prospects, but also recognised their role when companies were in stronger positions:

A lot of the factors drive buy-backs .. [it] is the economic picture as well as the stock market cycle. Companies have had strong profits [and] strong balance sheets, .... so they’ve perhaps had excess funds and they’ve been able to potentially feed that back to shareholders through various mechanisms ... So companies are in a stronger position to undertake share buy-backs ... At the same time ... we’ve had share prices falling at a time when, for a lot of companies, the business has been reasonably healthy and the balance sheets have been reasonably healthy [and] from that point of view, they have the power to undertake share buy-backs.

In relation to the role of repurchase programmes influencing future payment levels, private investors, it appears, were responsible for the high agreement level with this issue while institutional investors mirrored the



views of managers, that share repurchases played no significant role in affecting future dividends.

Regulation surrounding share repurchases in the UK

Consistent with chapters four and five, this section reports the results of the investors’ views in relation to regulation surrounding repurchase activity in the UK (see Table B, Appendix Three). Further, it compares the results reported with those of corporate managers as presented in chapter four.

Consistent with managerial views, investors believed that existing regulation enhanced the credibility of share repurchase activity, although this view was driven by a high agreement level (72%) from private investors. Private shareholders, indeed, also believed that the requirement to seek shareholder approval enabled companies to educate shareholders (mean score 3.75) although this view perhaps unsurprisingly was not strongly shared by either the financial managers (mean score of 3.13) or the institutional investors (mean score of 3.17).

The statements, which inquired into the restrictions that current regulation places on the usability and value of share repurchase programmes, generated statistically insignificant means which were matched with a high percentage of ‘no opinion’ responses. Investors, in other words, had no real opinions about the influence of current regulation in relation to the volume, timing and pricing of share repurchase programmes, or with the reporting requirements and regulation surrounding intentions to hold shares in treasury. This contrasted with the views of financial managers who, whilst neutral on the impact of volume, timing and pricing restrictions, did not view regulations regarding treasury shares or reporting requirements as restrictive.

Interestingly, when investors were questioned about the influence of their involvement in the approval process on share repurchase use



and value, they tended to agree with the statements put forward, indicating that their involvement served to contain repurchase practice within allowable limits. Considered alongside the views of financial managers, who broadly believed that shareholder involvement did not limit corporate practice, these results suggest that each group is content with shareholder involvement, one believing that they as a stakeholder group play an important role in the process and the other, that this involvement does not interfere with corporate practice. Interviewee A, however, did not share the majority investor view and suggested that the investor approach at the approval stage was too passive as inertia appeared to rule.

Finally, in relation to the final two statements in this sub-section, while sub-groups of investors believed that share repurchases had spiralled out of control and that more regulation was required to protect investor interests, there was a wide diversity of responses among investors and the mean results were consequently statistically insignificant. No strong overall view could be discerned in contrast to the responses of financial managers, who, perhaps unsurprisingly, distinctly disagreed with both statements. While describing current regulation as protecting shareholder wealth superficially, Interviewee A explained that additional disclosures, in which management actually accounted for their actions, post-event, were required to enable investors to monitor managerial performance and also inform future approval strategy.

Companies do this sort of thing but they’re not very good at explaining to shareholders why they do them, or having got the approval .. not being very good at accounting for their operations within that policy as to whether it has been in the best interests of shareholders or not. There’s a tendency to get approval from the shareholders for transactions and there’s very little post-event reporting, that is, whether the transaction has lived up to its expectations or not. You’ve really got to do a lot of digging in



financial statements and other places to extract the info. If you had cumulative reporting you’d have more meaningful discussion around the subject... [at the AGMs]

However, as Interviewee B explained, assessing the value of a repurchase programme in a non-investment company is very challenging (vis a vis investment companies), which ironically also permits its continued high use.

Summary

This chapter presents the results of the survey aimed at the investor community. On the whole, examining the mean scores of the responses from investors and managers in relation to statements about the motivations underlying share repurchase programmes, it appears that investors as a group adopt a more ‘middle of the road’ approach in their views than their corporate counterparts; they were less extreme in supporting/refuting the motivations included in the questionnaire. Specifically, the highest and lowest scores for management were 4.15 and 1.71, relating to capital reallocation and dividend substitution, respectively, while those for investors were 3.87 and 2.45 relating to the role of share repurchase programmes for institutional investors and to dividend substitution, respectively. One possible reason for this may be the diversity of views expressed by investors as seen during the interviews.

There were a number of reasons that attracted more support from management than investors, and equally there were a few that attracted more support from investors than management. Only one area, namely that related to the impact of share repurchase programmes on corporate share price, generated views that were closely synchronised between management and investors.

Reasons that attracted relatively more managerial support included the capital reallocation explanation; the flexibility of share repurchase programmes and their substitutability in relation to special dividends;



and signalling of undervaluation and future income. Assuming comparability between the results, this gives rise to two key questions: (i) does managerial action through share repurchase programmes attract the intended investor reaction; and (ii) why do investors approve the use of share repurchase programmes, if they have less confidence than management in such programmes. Insights from the interviews indicate a large diversity in investor views, whereby some organisations are very supportive of share repurchase programmes while others are very sceptical and believe that inertia may have set in. In other words, parts of the investor community are likely to respond positively to share repurchase programmes and also support their approval at AGMs (amidst careful monitoring), while others respond less favourably, generating in aggregate lower mean scores than those of enthusiastic managers. Moreover, the educational role of current regulation that private investors particularly alluded to, may also be responsible for the high level of approval rates amongst this community.

Areas that attracted relatively more investor attention/support include the use of share repurchases to generate publicity and as a response to an emerging trend. Further, investors cited principal-agent problems as important in two distinct contexts: first, the direct role of share repurchase programmes in limiting principal-agent concerns; and second, their role in exacerbating those concerns when managerial reward structures are linked to movements in reported EPS levels. Unsurprisingly, these views are not matched by those of management.

Finally in relation to existing regulation surrounding UK share repurchase activity, investors, like management, believed that the regulations served to improve the credibility of share repurchase programmes and also provided an opportunity to develop investor understanding. Views on whether such regulation curbed the usefulness and benefits of share repurchase programmes were very diverse but one sub-group favoured greater regulation, as exemplified by one interviewee who called for more disclosures in which management accounted for their actions post-event to express whether intended objectives had been fulfilled or not.


7 conclusions

Introduction

This report contributes to the literature on the use of share repurchase programmes and seeks to explain the rise in repurchase activity in recent years, both generally and more specifically in the UK. It employs, for the first time in the UK, a survey based approach to examine the views of: (i) managers from investment and non-investment companies; and (ii) corporate investors in relation to the motivations underlying, and regulation surrounding repurchase activity in the UK. Moreover, it gathers views from non-repurchasing companies as well as repurchasing companies. The key findings and implications of these findings, as well as areas for future research, are reported below.

Motivations for share repurchases: non-investment companies

Open market share repurchase programmes dominate the repurchase activity of non-investment companies and the purchase arrangements are generally financed by existing cash balances.

Returning excess cash flows to shareholders appears to dominate corporate activity and this result perhaps serves to explain the subsequent fall during the financial crisis characterised by a fall in profits and a lack of credit. However, multiple motivations, drive repurchase programmes in non-investment companies and this multiplicity extends not only between companies but also within them. Additional factors contributing to actual repurchases include: the influencing of reported EPS levels; the signalling of undervaluation to capital markets; and the



optimising of companies’ gearing ratios. Somewhat surprisingly only 25% of companies engage in share repurchase programmes to increase corporate share price, although this low percentage may be explained, in part, by the companies’ overwhelming intention to simply return surplus cash to investors and focus on financial management targets other than the corporate share price per se.

Overall, these specific motivations identified by repurchasing companies, are broadly in line with the generalist views cited by both the repurchasing and non-repurchasing companies. There are, however, a number of areas where some small differences emerged; for example, although half of the sample companies generally agreed that signalling undervaluation and conveying news about expectations of future performance as well as the reallocation of capital in an efficient manner drive share repurchase programmes, less than 25% of repurchasing companies cited them as influencing their respective repurchases. Similarly, while repurchases were seen in general as a substitute for special (although not regular) dividends, only four repurchasing companies cited dividend substitution as motivating their particular programmes.

There appears to be little difference between the views of managers of repurchasing and non-repurchasing companies in relation to the motivations underlying repurchases, generally. Specifically, 29 of the 35 statements included in this study generated statistically insignificant differences between the views of managers of repurchasing companies and non-repurchasing companies. These results suggest that differences in perceptions between the two groups do not explain the decisions to actually use a share repurchase programme. Indeed, a significant and a rising proportion of non-repurchasing companies had sought approval from investors (68% as at 2007) to engage in repurchase activity. Rather, the lack of finance and adverse shareholder responses, it appears, are responsible for the absence of repurchase enactments in the non-repurchasing companies.


107ConCLuSIonS

Motivations for share repurchases: investment companies

Investment companies also rely heavily on open market share repurchases, although tender offers are used as well. Repurchases are financed principally by the sale of investments.

The main factors contributing to the use of share repurchase programmes among repurchasing investment companies appear to be the management of Net Asset Value (NAV) per Share and the discount to NAV, both of which are specific to investment companies. Managing market liquidity is also important for investment companies, in contrast to their non-investment company counterparts. The direct management of share price is not a major driver for repurchasing investment companies. Other reasons that receive little support include signalling future performance, governance matters and capital structure.

Once again the specific points identified above are consistent with the views expressed by both repurchasing and non-repurchasing investment companies on the motivations underlying repurchases generally. Further, the views of managers of repurchasing and non-repurchasing investment companies are very similar, any differences generally relating to the strength with which views are held; repurchasing companies typically have stronger views. As with non-investment companies, these results indicate that decisions to engage in or refrain from share repurchases are not a result of differences in perceptions about such programmes between repurchasing and non-repurchasing companies, but rather, the absence of significant benefits from such programmes for the respective companies and/or the costs associated with such activity. Just as the value implications of repurchase programmes are more obvious with investment companies than non-investment companies, the costs, it would appear, are also more prominent, restricting their use in these companies.

Overall, the results in relation to the management of the NAV and discount to NAV are consistent with prior academic research, although



those in relation to the management of liquidity contradict those of Porter et al. (1999) who examined US based close end funds.

Motivations for share repurchases: investors

Investors, it appears, adopt a more ‘middle of the road approach’ in their views about the motives underlying share repurchase programmes than their corporate counterparts; they were less extreme in supporting/refuting the motivations that were presented to them in the questionnaire. A number of motivations attracted more managerial support than investor support, and equally there were a few that attracted more investor support than managerial support. Only one area generated closely synchronised views between management and investors, that relating to the impact of share repurchase programmes on corporate share price. Both groups marginally supported the view that share repurchase programmes increase share price and acknowledged the role of repurchase announcements in so doing, but believed that changes to company value, if any, were likely to be gradual, taking place over a long-term period.

Reasons that attracted relatively more managerial support included: capital reallocation in which surplus funds are returned to investors in the absence of value enhancing projects; the flexibility of share repurchase programmes and their substitutability in relation to special dividends; the role of share repurchase programmes in influencing corporate gearing levels; and signalling in relation to both the current undervaluation of a company and its future income.

Areas that attracted relatively more investor attention/support included: share repurchase announcements enabling companies to generate publicity in the markets; and that repurchase programmes may be an emerging trend. Moreover, investors provided more support for the agency view of share repurchase programmes, although they also identified share repurchase programmes as exaggerating such principal-agent concerns when managerial reward structures were linked to market movements in EPS levels.


109ConCLuSIonS

Two key related questions that arise as a result of these differences are whether: (i) managerial action through share repurchase programmes attracts the intended investor reaction; and (ii) investors approve the use of share repurchase programmes by companies for the same reasons that managers intend to use them. Insights from the interviews suggest that the high approval rates by shareholders may be as a result of inertia and the passive involvement of shareholders.

Reflections into the role of existing UK repurchase regulation

Investors and corporate managers, alike believe that the current regulations under which share repurchase programmes in the UK are undertaken add credibility to such programmes; investors and investment company managers also suggest that the regulations provide an opportunity to educate shareholders. Focusing on specific parts of the specific regulatory framework, sub-groups of both investment companies and non-investment companies report that the listing requirements surrounding the volume, pricing and/or timing of repurchase programmes restrict the usefulness and value of share repurchase programmes. Indeed, this view is shared by a proportion of the investors. For all three stakeholder groups, however, this view is not universal. In relation to regulation concerning the reporting requirements to the FSA and the opportunity to hold shares in treasury, neither managers (from both investment companies and non-investment companies) nor investors consider such regulation to be restrictive.

Addressing shareholder involvement in the approval process of share repurchase programmes, financial managers broadly believe that this requirement does not curb corporate activity. At the same time investors, on average, appear to believe that they are playing a relevant role and their current level of involvement is valuable. A small group nevertheless believe that share repurchase activity has spiralled out of control and that more regulation is required to protect shareholder wealth; unsurprisingly this view is not shared by corporate managers.



International comparison

Motivations behind the use of share repurchase programmes in the UK, it appears, differ from those in the US and Australia. UK companies are more constrained in their views on the role of share repurchase programmes in influencing EPS levels, correcting undervaluation and influencing corporate share price, motives which dominate Australian and US companies’ programmes (Mitchell et al., 2001 and Baker et al., 2003). These differences in results may, in part, stem from the time periods when the various surveys of each country were conducted and the different circumstances and situations faced by the companies being surveyed; all of these may increase or reduce the relevance of specific drivers. For example, the recent developments in the area of corporate governance may be responsible for encouraging companies to pay back surplus cash to investors.

In addition, the more stringent operational conditions of the UK, enforced through regulations stipulated by the UKLA and the Companies’ Act, may also be responsible for variations in findings across companies. The volume and timing restrictions stipulated by the UKLA rules may limit the opportunities for companies to signal undervaluation and influence corporate share price. As such the UK results indicate that current regulation seems to achieve its aims; UK managers’ general satisfaction with this regulation and the absence of any regrets about opportunities to repurchase shares is not considered an obstacle to corporate financial management practices.

Policy implications

The policy implications arising from this study are:

• Managers and more importantly, non-executives with their fiduciary responsibilities, need to carefully assess recommendations from bankers and advisors in relation to share repurchase programmes


111ConCLuSIonS

because, as highlighted in the investor survey, they stand to gain from such programmes and thus their advice may lack objectivity.

• When managers use share repurchase programmes to capitalise on those characteristics which distinguish them from other distribution methods, they should emphasise the particular benefits such programmes generate which are, or may not be, provided by alternative distribution networks. A more extreme version of this, as suggested by the UKSA and supported by one of the interviewees in the study, is that regulation that requires companies to justify their use of share repurchase programmes over alternative distribution methods should be put in place.

• In addition, as suggested by one of the interviewees, to demonstrate good practice, management might report on the outcome of share repurchase transactions post-event to demonstrate the value of such programmes for investors. The UKSA once again holds a more stringent view and believes that regulation should be put in place to enforce such practice.

• Finally, from a shareholder perspective, while investors seek to discount the impact of share repurchase programmes on EPS levels to determine the ‘true’ level, managers may nevertheless be inclined to attempt to manipulate this ratio if their reward structures are tied to it. Indeed, as seen in the investor survey, managers are seen to be significant beneficiaries of such programmes and thus, where appropriate, investors should campaign for a change in such reward structures.

Limitations and areas for future research

While the survey generated sound response levels from the investment companies and non-investment companies, those from corporate investors, particularly institutional investors were disappointing; this



disappointment also extended to the participation of investors in the interviews. Results relating to the views from institutional investors should therefore be treated with caution, particularly in the context of the interviews, where the views may not be representative of the general population.

Nevertheless, the more detailed insights from the interviewees highlight the benefits of interviews in this area of financial management, and more generally. Therefore future research may seek to gather more detailed views from investors as well as corporate managers, who will also have their own perspectives on the subject area. Moreover, new research can shed light on why the pattern of growth in share repurchase programmes has reversed during the recent financial global crisis, and what investors and managers expect the future to hold. Finally, future, capital markets based research may seek to examine the effects of the specific volumes of activity by individual companies and the timing of repurchase programmes on share price responses to such news; these were cited as being of relevance by the interviewees.

Summary

This report examines UK investment companies’ and non-investment companies’ reasons for employing share repurchase programmes and shareholders’ views of such programmes. Results of the research indicate that only a select sample of reasons appear to drive repurchase activity in the UK and that the reasons differ between investment companies and non-investment companies reflecting the differences in their operating characteristics. In addition, regulation in the UK appears to shape repurchase activity, although it is not seen to restrain corporate activity, and both managers and investors are broadly content with it. Nevertheless there is room for additional reporting guidelines and the differences in the views of corporate managers and investors also need to be addressed.


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appendix 1

Views of financial managers of non-investment companiesTable A Motivations underlying the use of share repurchase programmes:

The general views of respondents

Statements

All companies (n = 97)



AgreeDis-agree Mean Agree

Dis-agree Mean Agree

Dis-agree Mean

Repurchase programmes and share prices % % % % % %

10. Share repurchases increase company share price.

39 27 +3.13 38 26 +3.14 41 28 +3.10

11. Share prices respond immediately to a share repurchase.

18 57 2.57 14 61 2.50 28 48 +2.72

12. Share prices respond gradually, over a longer period, to a share repurchase.***

51 25 3.23 63 19 3.41 24 38 +2.83

13. Announcements of intentions to repurchase shares lead to share price rises.

42 26 3.18 40 29 +3.12 45 17 3.31

Repurchases versus dividends % % % % % %

1. Share repurchases are a substitute for regular dividend payments.

3 91 1.71 3 91 1.76 3 90 1.60

2. Share repurchases are a substitute for increases in regular dividend payments.

10 79 2.08 14 77 2.17 3 83 1.90

3. Share repurchases are a substitute for special dividend payments.**

67 20 3.59 74 18 3.73 50 23 +3.30

4. Share repurchases offer a flexible means to return surplus cash to shareholders.***

85 6 4.05 91 6 4.20 73 7 3.73

Signalling undervaluation/future performance % % % % % %

5. Share repurchases signal to the markets that the company’s shares are intrinsically undervalued.

51 27 3.34 50 29 3.30 53 23 3.43

6. Share repurchases signal managements’ confidence in future earnings/share prices.

63 21 3.48 65 15 3.56 57 33 3.30

7. Share repurchases signal a permanent improvement in corporate earnings.

11 58 2.44 12 56 2.48 10 63 2.33

8. Share repurchases signal a temporary improvement in corporate earnings.

18 52 2.56 20 52 2.62 13 53 2.43

9. Share repurchase announcements enable the company to gain publicity in the markets.

42 28 +3.09 38 31 +3.00 54 21 +3.29


118 appendix 1

Table A Motivations underlying the use of share repurchase programmes: The general views of respondents (Cont.)




Statements AgreeDis-agree Mean Agree


Dis-agree Mean

Capital structure and investment decisions % % % % % %

15. Share repurchase decisions are made after capital structure decisions have been reached.

76 6 3.86 76 6 3.86 76 7 3.86

16. Share repurchase decisions are made after investment decisions have been reached.

85 2 3.98 88 2 3.98 79 3 3.97

14. Share repurchases are used to increase the company’s gearing (debt to equity) ratio.

56 29 3.35 57 28 3.35 55 31 3.34


% % % % % %

19. Share repurchases ensure that surplus cash is returned to shareholders and thus overcome the perception that funds may otherwise be misused internally.*

40 29 +3.15 44 21 3.26 31 45 +2.90

Efficient capital reallocation % % % % % %

4. Share repurchases offer a flexible means to return surplus cash to shareholders.

85 6 4.05 91 6 4.20 73 7 3.73

17. In the absence of corporate value enhancing investment opportunities, share repurchases enable companies to return the wealth to their shareholders, who can themselves re-invest it in value enhancing investments.

95 2 4.15 94 3 4.15 97 0 4.14

18. Shares are repurchased when they offer a better investment opportunity relative to alternative investment opportunities.

67 16 3.64 68 18 3.64 66 10 3.66


119appendix 1







Dis-agree Mean

Stakeholder expectations % % % % % %

26. Shareholder views/requirements are an important consideration when reaching share repurchase decisions.***

83 7 3.95 76 11 3.80 100 0 4.28

27. The beneficiaries of share repurchase programmes are:

i. Institutional investorsii. Private investorsiii. Managementiv. Employeesv. Bankers and advisorsvi. Sellers in repurchase

programmesvii. Non-sellers in repurchase

programmes

828130214741

42

45

24292014

8

3.943.87

+3.05+2.853.303.29

3.38

858335254939

47

56

22292119

9

3.953.88

+3.13+2.923.303.23

3.42

767621104146

32

33

2831174

4

3.903.86

+2.902.693.313.43

3.29

Improving reported financial performance % % % % % %

20. Share repurchases are used to increase company EPS.

76 10 3.83 74 9 3.85 79 10 3.79

Reissue considerations % % % % % %

21. Share repurchases are used to generate shares for re-issue (e.g. to fulfil employee stock options or SCRIP dividends for investors).

40 32 +3.05 47 29 +3.21 31 35 +2.86

Managing takeover threats % % % % % %

28. Share repurchases are a useful tool to protect against a potential takeover.

24 52 2.58 24 52 2.55 25 50 2.64


120 appendix 1







Dis-agree Mean

Other reasons for share repurchases % % % % % %

25. Share repurchases are on the rise because they are fashionable.

20 36 2.82 19 35 +2.83 24 38 +2.79

24. Share repurchases help to improve the market liquidity of a firm’s shares.

15 61 2.45 15 61 2.47 14 62 2.41

23. Share repurchases are more appropriate in falling markets than in rising markets.

15 34 2.79 9 33 2.74 28 34 +2.90

22. Share repurchases are used to improve future dividend per share (DPS) or reduce the company’s commitment to total future dividend payments by reducing the number of shares outstanding.*

40 38 +3.01 36 46 +2.89 48 21 +3.28

Notes: This table reports the respondents’ views in relation to the use of share repurchase programmes for the total sample. The results tabulated include the percentage agreement and disagreement levels and the mean scores based on a five point Likert scale where 1 is equivalent to strongly disagree, 5, strongly agree and 3, no opinion. The numbering by the statements indicates the order in which they appeared in the questionnaire.

+ indicates a mean score statistically insignificant from the value of 3 (no opinion).

*/**/*** indicates a significant difference at the 10%, 5% and 1% levels, respectively between the views of repurchasing and non-repurchasing companies.


121appendix 1

Table B Respondent perceptions in relation to regulation surrounding repurchase activity in the UK

Statements

All companies

(n = 97)

Repurchasers

(n = 66)

Non-repurchasers

(n = 31)



Dis-agree Mean

% % % % % %

2. The stringent regulations under which repurchase programmes are undertaken gives such activity more credibility than if undertaken in the absence of such regulation.

66 15 3.54 67 17 3.53 66 10 3.55

1. The requirement to seek shareholder approval enables companies to educate shareholders about the usefulness of repurchase programmes.

44 28 +3.13 39 29 +3.05 55 24 3.31

3a. Regulation surrounding the volume, pricing and/or timing of open market repurchases as stipulated by the listing rules restricts the use and value of open market repurchase programmes.

33 36 +3.01 33 38 +2.98 31 31 +3.07

3b. Administrative burden of reporting repurchase activity to the FSA and in annual reports restricts the use and value of open market repurchase programmes.

5 65 2.33 5 67 2.27 7 62 2.45

3c. Regulation surrounding the intention to hold the shares as treasury shares restricts the use and value of open market repurchase programmes.

8 53 2.49 9 53 2.47 7 52 2.55

3d. Regulation to seek regular approval from shareholders to engage in repurchase activity restricts the use and value of open market repurchase programmes.**

19 51 2.65 15 56 2.53 28 38 +2.93


122 appendix 1

Table B Motivations underlying the use of share repurchase programmes: the general views of respondents (Cont.)

Statements

All companies

(n = 97)

Repurchasers

(n = 66)

Non-repurchasers

(n = 31)



Dis-agree Mean

% % % % % %

3e. The motives of repurchases agreed with shareholders at approval restrict the use and value of open market repurchase programmes.

14 42 2.67 8 44 2.58 28 38 +2.90

3f. The volume and pricing conditions of repurchases agreed with shareholders at approval restrict the use and value of open market repurchases.*

19 36 2.80 12 39 2.70 31 28 +3.03

4. Regulation surrounding repurchase activity has had little impact and therefore repurchase programmes have spiralled out of control.*

2 77 2.06 3 79 1.98 0 72 2.24

5. Regulation surrounding repurchase activity has not fully protected shareholders and further regulation (such as companies justifying their use of repurchase programmes over other income distribution strategies) is therefore required.

3 74 2.04 5 79 1.97 0 62 2.21





appendix 2

Views of financial managers of investment companies

Table A Motivations underlying the use of share repurchase programmes: The general views of respondents

Statements






Dis-agree Mean

Share repurchases and company share prices % % % % % %

2. Share repurchases increase company share price.

50 26 3.29 50 32 +3.23 50 20 3.35


20 51 2.63 10 62 2.43 30 40 +2.85

4. Share prices respond gradually, over a longer period, to a share repurchase.***

51 20 3.34 71 5 3.67 30 35 +3.00


34 32 +2.98 38 43 +2.81 30 20 +3.15

Net Asset Value and discount management % % % % % %

5. Share repurchases enhance net asset value (NAV) per share.*

93 2 4.36 100 0 4.57 86 5 4.14

6. Share repurchases reduce the discount to NAV.

49 22 3.34 67 19 3.52 30 25 +3.15

7. Share repurchases reduce the volatility of the discount to NAV.

55 33 3.29 68 23 3.45 40 45 +3.10


124 appendix 2







Dis-agree Mean

Signalling future performance and corporate governance % % % % % %

9. Share repurchase are a response to poor past performance.**

15 76 2.17 10 81 1.86 20 70 2.50

10. Share repurchases signal improved future performance.

5 76 2.05 5 81 1.95 5 70 2.15

11. Share repurchases signal a lack of future growth opportunities for the company.*

19 66 2.34 10 76 2.00 30 55 +2.70


32 34 +2.93 33 38 +2.86 30 30 +3.00

17. Share repurchases signal improved corporate governance through increased director oversight of the fund manager(s).

24 42 2.73 24 43 +2.71 25 40 +2.75

18. Share repurchases signal improved corporate governance through increased director independence from the fund manager(s).

24 44 2.71 19 48 2.62 30 40 +2.80

Market liquidity and reissue consideration % % % % % %

13. Share repurchases help to improve the market liquidity of a firm’s shares.

56 24 3.44 62 29 3.48 50 20 +3.40

14. Share repurchases enable companies to better manage supply and demand for their shares.

73 8 3.75 70 10 3.65 75 5 3.85

15. Share repurchases are used to generate shares for re-issue.

10 66 2.32 14 67 2.29 5 65 2.35

Capital structure % % % % % %

16. Share repurchases are used to increase the company’s gearing (debt to equity) ratio.*

2 63 2.24 0 76 2.00 5 50 2.50


125appendix 2







Dis-agree Mean



39 39 +2.85 38 43 +2.81 40 35 +2.90


21. Shareholder views/requirements are an important consideration when reaching share repurchase decisions.

93 0 4.18 90 0 4.20 95 0 4.15


i. Institutional investorsii. Private investorsiii. Managementiv. Brokers and advisorsv. Sellers in repurchase programmesvi. Non-sellers in repurchase

programmes

778315557556

38

67208

23

3.823.902.333.303.783.41

808110528060

05

65145

20

3.903.902.353.383.803.45

748421587053

51169261026

3.743.892.32

+3.213.75

+3.37

Other reasons for share repurchases % % % % % %


12 63 2.41 5 62 2.29 20 65 2.55


15 59 2.44 19 48 2.57 10 70 2.30





126 appendix 2





Statements



Dis-agree Mean

% % % % % %


68 16 3.61 63 16 3.47 74 16 3.74

1. The requirement to seek shareholder approval enables companies to educate shareholders about the usefulness of repurchase programmes.

53 18 3.29 47 21 +3.26 58 16 +3.32


35 41 +2.97 47 42 +3.05 22 39 +2.89

3b. Administrative burden of reporting repurchase activity to the FSA and in annual reports restricts the use and value of open market repurchase programmes.

14 70 2.41 11 63 2.37 17 78 2.44


24 43 +2.81 26 42 +2.79 22 44 +2.83

3d. Regulation to seek regular approval from shareholders to engage in repurchase activity restricts the use and value of open market repurchase programmes.

24 65 2.51 21 68 2.47 28 61 +2.56


127appendix 2

Table B Respondent perceptions in relation to regulation surrounding repurchase activity in the UK (Cont.)

Statements






Dis-agree Mean

% % % % % %

3e. The motives of repurchases agreed with shareholders at approval restrict the use and value of open market repurchase programmes.*

21 45 +2.76 25 30 +3.00 17 61 2.50

3f. The volume and pricing conditions of repurchases agreed with shareholders at approval restrict the use and value of open market repurchases.

30 41 +2.86 26 42 +2.84 33 39 +2.89

4. Regulation surrounding repurchase activity has had little impact and therefore repurchase programmes have spiralled out of control.

5 68 2.08 5 75 1.95 6 61 2.22


13 67 2.13 5 80 1.90 21 53 2.37





appendix 3

views of investors

Table A Motivations underlying the use of share repurchase programmes: the general views of respondents

Statements

All investors (n = 57)

Private investors (n = 39)

Institutional investors (n = 18)



Dis-agree Mean

Repurchase programmes and share prices % % % % % %

10. Share repurchases increase company share price.*

41 26 +3.17 47 19 3.36 28 39 +2.78


30 35 +2.94 25 33 +2.97 39 39 +2.89

12. Share prices respond gradually, over a longer period, to a share repurchase.

53 15 3.39 61 14 3.50 39 17 +3.17


48 30 +3.19 53 31 3.28 39 28 +3.00

Repurchases vs dividends % % % % % %

1. Share repurchases are a substitute for regular dividend payments.***

25 60 2.45 34 49 +2.83 6 83 1.72

2. Share repurchases are a substitute for increases in regular dividend payments.**

35 54 +2.74 42 42 +3.03 22 78 2.17

3. Share repurchases are a substitute for special dividend payments.

52 35 +3.22 42 39 +3.14 72 28 +3.39


61 20 3.43 53 25 +3.28 78 11 3.72


130 appendix 3

Table A Motivations underlying the use of share repurchase programmes: the general views of respondents (Cont.)

Statements






Dis-agree Mean

Signalling undervaluation/future performance % % % % % %

5. Share repurchases signal to the markets that the company’s shares are intrinsically undervalued.

47 19 3.32 43 23 +3.23 56 11 3.50

6. Share repurchases signal managements’ confidence in future earnings/share prices.**

52 19 3.43 58 8 3.64 39 39 +3.00

7. Share repurchases signal a permanent improvement in corporate earnings.**

17 51 2.51 23 40 +2.74 6 72 2.06

8. Share repurchases signal a temporary improvement in corporate earnings.

33 28 +3.07 36 25 +3.14 28 33 +2.94


57 17 3.48 58 14 3.56 56 22 +3.33

Capital structure and investment decisions % % % % % %

15. Share repurchase decisions are made after capital structure decisions have been reached.*

49 11 3.49 40 11 3.37 67 11 3.72

16. Share repurchase decisions are made after investment decisions have been reached.

63 9 3.54 61 11 3.47 67 6 3.67

14. Share repurchases are used to increase the company’s gearing (debt to equity) ratio.

38 23 +3.21 31 17 +3.20 50 33 +3.22

Managing principal-agent problems % % % % % %

19. Share repurchases ensure that surplus cash is returned to shareholders and thus overcome the perception that funds may otherwise be misused internally.**

60 9 3.62 46 11 3.49 89 6 3.89


131appendix 3


Statements






Dis-agree Mean



61 20 3.43 53 25 3.28 78 11 3.72

17. In the absence of corporate value enhancing investment opportunities, share repurchases enable companies to return the wealth to their shareholders, who can themselves re-invest it in value enhancing investments.**

59 24 3.48 50 25 3.31 78 22 3.83


50 24 3.31 44 22 +3.22 61 28 +3.50


26. Shareholder views/requirements are an important consideration when reaching share repurchase decisions.*

65 19 3.65 53 23 3.43 83 11 4.00


i. Institutional investorsii. Private investorsiii. Management*iv. Employeesv. Bankers and advisorsvi. Sellers in repurchase

programmesvii. Non-sellers in repurchase

programmes

755265346262

28

8238

23118

21

3.873.273.69

+3.043.683.70

+3.06

775059345460

20

0241226176

17

4.03+3.263.53

+3.003.543.77

+3.06

725678337867

44

22220

170

11

28

3.56+3.284.00

+3.113.943.56

+3.06

Improving reported financial performance % % % % % %

20. Share repurchases are used to increase company EPS.

54 26 3.33 50 28 +3.31 61 22 +3.39


132 appendix 3


Statements




AgreeDis-agree Mean

Agree Dis-agree Mean Agree

Dis-agree Mean

Re-issue considerations % % % % % %

21. Share repurchases are used to generate shares for re-issue (e.g. to fulfil employee stock options or SCRIP dividends for investors).

39 17 3.24 42 19 3.28 33 11 +3.17

Managing takeover threats % % % % % %

28. Share repurchases are a useful tool to protect against a potential takeover.***

49 20 3.43 59 9 3.78 29 41 +2.76

Other reasons for share repurchases

% % % % % %


41 22 3.24 42 19 3.28 39 28 +3.17

24. Share repurchases help to improve the market liquidity of a firm’s shares.***

37 32 +3.04 45 17 3.31 22 61 2.50


41 17 3.35 42 11 3.44 39 28 +3.17

22. Share repurchases are used to improve future dividend per share (DPS) or reduce the company’s commitment to total future dividend payments by reducing the number of shares outstanding.**

61 15 3.52 69 8 3.72 44 28 +3.11


+ indicates a mean score statistically insignificant from the value of 3 (no opinion). */**/*** indicates a significant difference at the 10%, 5% and 1% levels, respectively

between the views of repurchasing and non-repurchasing companies.


133appendix 3


Statements






Dis-agree Mean

% % % % % %


67 9 3.63 72 8 3.75 56 11 +3.39

1. The requirement to seek shareholder approval enables companies to educate shareholders about the usefulness of repurchase programmes.**

67 22 3.56 72 17 3.75 56 33 +3.17


30 25 +3.06 26 20 +3.09 39 33 +3.00

3b. Administrative burden of reporting repurchase activity to the FSA and in annual reports restricts the use and value of open market repurchase programmes.*

19 39 +2.83 24 29 +2.97 11 56 2.56


17 25 +2.94 17 23 +2.97 16 28 +2.89

3d. Regulation to seek regular approval from shareholders to engage in repurchase activity restricts the use and value of open market repurchase programmes.**

43 34 +3.19 54 26 3.40 22 50 +2.78


134 appendix 3

Table B Respondent perceptions in relation to regulation surrounding repurchase activity in the UK (Cont.)

Statements






Dis-agree Mean

% % % % % %

3e. The motives of repurchases agreed with shareholders at approval restrict the use and value of open market repurchase programmes.

40 25 3.21 47 21 3.32 28 33 +3.00

3f. The volume and pricing conditions of repurchases agreed with shareholders at approval restrict the use and value of open market repurchases.

40 25 +3.15 35 21 +3.18 50 33 +3.11

4. Regulation surrounding repurchase activity has had little impact and therefore repurchase programmes have spiralled out of control.

35 24 +3.09 39 25 +3.17 28 22 +2.94


38 30 +3.13 43 29 +3.26 28 33 +2.89





About the Authors

Alpa Dhanani is Senior Lecturer in Accounting and Finance at Cardiff Business School, where she also completed her PhD studies. Alpa’s research interests lie in the field of corporate financial management. She teaches finance primarily to second and third year undergraduate students, but has also taught on accounting based modules and a research methods module at the postgraduate level.

Roydon Roberts is Lecturer in Accounting and Finance at Cardiff Business School. He is also a fellow of the Institute of Chartered Accountants in England and Wales. Roydon’s research interests lie principally in the field of corporate financial management and audit fee determinants. He teaches final year undergraduates on specialist finance modules and Financial Management to MBA students.


Corporate Share Repurchases:The Perceptions and Practices of UK Financial Managers and Corporate Investors

Researchers: Alpa Dhanani Roydon Roberts

Corporate Share R

epurchases: The Perceptions and Practices of UK

Financial Managers &

Corporate Investors

Corporate Share Repurchases: The Perceptions and Practices of UK Financial Managers and

Corporate Investors



The study uses a survey approach to obtain the views of managers of investment and non-investment companies and the investor community. Perceptions on the motivations for share repurchase activity are compared and contrasted as well as reflections on the role of regulation. The report concludes with four policy implications for managers and investors to consider.

ISBN 978-1 904574-545EAN 9781904574545

CA HOUSE • 21 HAYMARKET YARDS • EDINBURGH • EH12 5BHTEL: 0131 347 0237 • FAX: 0131 347 0114

EMAIL: [email protected] • WEB: www.icas.org.uk/research

Dhanani Covers - Oct 09.indd 1 16/11/2009 16:34

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Corporate Share Repurchases: The Perceptions and Practices of