When Repurchases Resemble Dividends: Frequent versus Infrequent Repurchasers

Abstract

I demonstrate that frequent repurchasers resemble dividend payers and their repurchases are sticky and inflexible, like dividends. In contrast, infrequent repurchasers follow a flexible buyback policy and quickly respond to earnings changes. Investors react more positively to infrequent repurchasers’ repurchase announcements and actual repurchases, consistent with stronger signals of undervaluation and improvement in future prospects. Frequent repurchasers, however, repurchase to offset dilution caused by equity compensation. The shift in repurchase behavior from infrequent to frequent explains why traditional motives such as flexibility and signaling fail to describe the recent surge in repurchases.