How Do Stock Repurchases Affect Bank Holding Company Performance?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in ABSTRACTUsing data from bank holding company regulatory reports, we examine the relationship between stock repurchases and financial performance for a large sample of bank holding companies over the years 1987 to 1998. The primary result is that higher levels of repurchases in one year are associated with higher profitability and a lower share of problem loans in the subsequent year. This finding is robust to several different ways of measuring share repurchase activity. Our results appear to be driven primarily by bank holding companies with publicly traded stock, especially those companies whoe stock is traded on major exchanges.The finding that higher repurchases are followed by better financial performance is consistent with at least two distinct behavioral hypotheses. First, bank holding company managers may opt to return excess funds to shareholders when they have limited outside investment opportunities. Alternatively, managers may choose to increase repurchases when they have private information suggesting that the future profitability of the bank is likely to be strong. We find evidence suggesting that the repurchase-performance link may be driven by different factors for different types of bank holding companies. In particular, the evidence is consistent with the first hypothesis for banks traded on major stock exchanges, but only weakly supports this explanation for smaller, closely held companies.

The Determinants of the Value Created by Stock Repurchase Programs

“…Some of them adopted new legislative rules to introduce these programs for the first time, like Japan in 1995 or Finland in 1997. Other countries approved some legislative changes to encourage firms to be more familiar with these programs like the United Kingdom in 2003 (Hirtle, 2001).…”

“…We then matched this sample to Thomson Financial database, Worldscope and Compustat files with annual financial data available. To get more rigorous results and to conform with previous studies (Porter et al, 2000;Hirtle, 2001;Lamba and Ramsay, 2005), we withdrew all firms that had reported negative equity capital and firms involved in significant mergers during the sample period. The final selection allowed us to get relevant information for 200 firms.…”