Do strategic share repurchase programs create long-run firm value? a free cash flow analysis

Abstract

This study has two primary objectives first, to determine if companies that initiate a share repurchase strategy experience a higher long-run growth in firm value than companies not pursuing a share repurchase strategy. Another objective is the assessment or the relationships between changes in a firm's cash flow components to the creation of firm value resulting from the application of a repurchasing strategy. The performance of a large sample of companies repurchasing shares is compared to a matched sample of companies that do not pursue a share repurchase strategy financial and market data have been collected for each of the sample companies throughout the period January 1976 to December 1995. The findings in the paper do not support the theories that share repurchase programs are related to management signaling an increase in a firm's long-run performance in the market. Additionally, in measuring the relationship between the growth in firm value and the performance of the free cash flow components. the regression result~ found that the growth in the Value of non-repurchasing firms was related to the contribution of net working capi1al (NWC") and c:ipital investment (Nif*). It also found that net operating flows were not closely related to the growth in firm value. Nor do the findings indicate that a strategy to repurchase shares signals that shares are undervalued. Nevertheless, there is significant improvement in the firm value growth (FVG) of repurchasing firms in the period immediately following the initiation of a share repurchase program. This finding is generally consistent with the existing literature. However, this higher level of FVG growth is not sustained in the long term.