Do strategic share repurchase programs create long-run firm value

This study has two primary objectives. First, to determine if companies that initiate a share repurchase strategy experience higher long-run growth in firms value than companies not pursuing a share repurchase strategy. Another objective is the assessment of the relationship between changes in a firm's cash flow components to the creation of firm value resulting from the application of a repurchasing strategy. The performance of a large sample of companies repurchasing shares is compared to a matched sample of companies that do not pursue a share repurchase strategy. Financial and market data have been collected for each of the sample companies throughout the period January 1976 to December 1995.; Repurchasing and non-repurchasing firms have been further classified and analyzed according to size, book-to-market measure, magnitude of the buyback program, period and offer type. Together with cash flow analysis numerous other financial indicators are examined. They include, Return on Assets (ROA), Return on Sales (ROS), Return on Equity (ROE), Sustainable Growth Rate (SGR), Book-to-Market (B/M) and Tobin's Q. In addition, common criteria including dividend analysis, earnings analysis, leverage analysis and risk (beta) analysis were investigated.; The findings in the paper do not support the theories that share repurchase programs are related to management signaling an increase in a firm's long-run performance in the market. Contrary to the hypothesized relationships, mean values of Tobin's Q were found to be slightly higher in the non-repurchasing group of companies. Non-Repurchasing firms also show lower B/M measures. The results indicate that the long-term rates of growth are higher for firm's not implementing a share repurchase strategy vis-a-vis firms using a share repurchase strategy. Additionally, in measuring the relationship between the growth in firm value and the performance of the free cash flow components, the regression results found that the growth in the value of non-repurchasing firms was related to the contribution of net working capital and capital investment. It also found that net operating flows were not closely related to the growth in firm value. There is, however, significant improvement in the growth in firm value of repurchasing firms in the period immediately following the initiation of a share repurchase program. This higher level of growth in firm value is not sustained in the long-term. The implementation of a repurchasing strategy is, in itself, not a panacea guaranteeing future wealth creation.