Transcript Determinants of Share Repurchases: International Evidence

Determinants of Share Repurchases:
International Evidence
Bong Soo Lee and Jungwon Suh
2008 NTU International Conference
Discussant:
Yanzhi Wang
Yuzn Ze University
1
Summary
• This study examines the patterns and determinants of share
repurchase using firm-level data from seven major countries:
Australia, Canada, France, Germany, Japan, the U.K., and
the U.S. over the period 2000-2005.
• They find that non-U.S. firms do not repurchase shares as
much as U.S. firms do.
• Firms generally do not use repurchases as a substitute for
dividends.
• Finally, repurchasing firms have different firm
characteristics- firm size, profitability, and so on.
• Across countries, the fact that large cash holdings are a key
motive for share repurchases is a crucial finding in this
paper.
2
Comments
• To me, this paper is very promising and
develops the study on repurchase across
countries.
• Very few papers examine the repurchases in an
international angle. The authors also link to
repurchase to dividend and look at the overall
payout, and this approach relates to modern
development in payout literature.
• My general comment is: I like this paper.
3
Comments
• My major concern is the inconsistency between the
title and the analyses of this paper.
– The paper seems aimed to study the international
repurchase, but the paper turns out to be a payout
paper that looks at repurchase and dividend at the same
time.
– I could understand that authors might want to link to
recent repurchase and dividend development (e.g., von
Eije and Meggionson, 2008; Skinner, 2008), but the
readers would be confused if they do not understand
the recent repurchase development.
4
Comments
• The measure of the repurchase ratio in this
paper is defined as the dollar amount bought
divided by total assets. (I guess the authors
using the book value of assets as the scale
variable in the paper but not the market value.)
5
Comments
• This approach raises two important concerns to me. First,
the repurchase ratio could be expressed as follow:
dollar amount bought back
repurchase ratio 
total assets
Pmkt  Shares bought back

Ppar  Shares outstandin g  book value of debt
Pmkt

 actual buback ratio (if we ignore the value of debt)
Ppar
• Pmkt/Ppar is very similar to market-to-book ratio (M/B) that
is the inverse of book-to-market ratio (B/M).
6
Comments
• Second, do the authors standardize repurchase-to-asset ratio by
inflation (or CPI)?
– If the inflations differ over countries, then it will be a concern.
For example, given that all countries have the same price level in
year 2000, the numerator (the dollar amount bought back) may
increase over years if U.S. has higher inflation rate while the
denominator (book value of assets) tends to be fixed (book value
of assets is less related to inflation).
• My suggestion: consider standardizing the repurchase ratio by
market value of equity as the conventional way does. This
could avoid the two concerns above.
7
Comments
• The authors argue that cash ratio is an important determinant
of share repurchase.
• I am questioning how the authors explain the cash ratio in
repurchases?
– Does it relate to free cash flow?
– In Chan, Ikenberry and Lee (2004), they use free cash flow
measured by Lehn and Poulsen (1989) and test the free cash flow
hypothesis.
– In fact, Chan et al (2004) also study actual buyback (defined as
the method by Stephens and Weisbach, 1998), actual buyback
ratio is related to B/M ratio but not free cash flow.
– Even the authors would like to explain in another way, the
authors also need to control the free cash flow concern.
8