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Open market share repurchases in the UK: evidence on the agency theory of free cash flow

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  • Magnus Hjelmstad
  • Andrew Marshall
  • Thomas Walmsley

Abstract

This paper examines the signalling theory and the agency theory of free cash flow in the context of open market share repurchases by considering the growth characteristics of the company making the announcement. These two theories are the most extensively discussed with regard to the well-documented positive market reaction associated with share repurchases. After confirming a significant positive market reaction on the announcement for our sample our findings show a significant negative relation between high growth companies and the abnormal returns on announcement, which is robust to several definitions of growth. We conclude that the positive market reaction associated with open market share repurchases in the UK is best explained by the agency theory of free cash flow.

Suggested Citation

  • Magnus Hjelmstad & Andrew Marshall & Thomas Walmsley, 2006. "Open market share repurchases in the UK: evidence on the agency theory of free cash flow," Applied Financial Economics Letters, Taylor & Francis Journals, vol. 2(6), pages 383-387.
    • Handle: RePEc:taf:raflxx:v:2:y:2006:i:6:p:383-387
    DOI: 10.1080/17446540600706791
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