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Effects of financial constraints and product market competition on share repurchases

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  • Gyimah, Daniel
  • Siganos, Antonios
  • Veld, Chris

Abstract

This study explores the importance of financial constraints and product market competition on the share repurchase decision. We find that financially constrained firms are more likely to conduct debt-financed share repurchases. Financially unconstrained firms, however, tend to conduct debt-financed repurchases only when debt market conditions are favourable. We also find that the level of industry competition is a significant factor behind managers’ decisions. High (low) industry competition forces financially unconstrained and undervalued firms to reduce (increase) the agency costs of free cash flows from overvalued debt financing. The implication is that firms in high-competition industries disburse excess cash through share repurchases. We find that this effect is strongest in periods outside financial crises.

Suggested Citation

  • Gyimah, Daniel & Siganos, Antonios & Veld, Chris, 2021. "Effects of financial constraints and product market competition on share repurchases," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:intfin:v:74:y:2021:i:c:s1042443121001098
    DOI: 10.1016/j.intfin.2021.101392
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    More about this item

    Keywords

    Agency costs; Free cash flows; Cross-market arbitrage; Share repurchases; Financial constraints; Product market competition;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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