This study examines the motives for share repurchases. Whereas most prior research points to either the signaling or free cash flow hypothesis, we find that the motives for repurchases differ depending on the firm's life cycle stage. Specifically, we find that a firm in the growth stage tends to announce a repurchase program to signal its undervalued stock whereas a firm in the mature stage is prone to buy back shares to dispense excess free cash flow. We also find that the market reaction to repurchase announcements corroborates this life-cycle argument.
- Free cash flow
- Life cycle