Share Repurchases, Cash Dividends And Coporate Value

Stock repurchase is an important means for dividend payments on mature markets, share buybacks rise rapidly in the past 10 years in European and American companies as dividend expenditures, and it is occupying an increasingly important position.Early share repurchases was an solution to large shareholder's asset expropriation, mergers and acquisitions, a special tool for stripping bad assets in China. These repurchases are special cases, needing approval, with low frequencies. Since equity split reform in 2005, the company's corporate governance structure are growing healthier, stock repurchase plays as company's profit distribution policy more, together with cash dividends as cash payout mechanism resuting in company's cash outflow.On July 9,2015, the SEC China acclaimed during irrational plump in stock market that time, in order to maintain a stable capital market, require listed companies to develop programs to maintain stable share price, techniques include dominant shareholders increase number of holdings, managers increse their holdings, innitiate equity incentive programs or employee stock option plan which called by media as "five choose one". As a response, from July 1,2015 to September 31,2015,93 companies issued share repurchase announcement, including 37 public-oriented repurchases, of which four repurchase is completed, two aborted. Experienced 2015 bear market and regulators encourage companies which with abundant cash ability to buyback stock to support price and after the company intensive repurchase announcement, ordinary investor and company mananger start familiar with repurchase.Compared to other payment methods, such as reserve for dividends, bonus issue, rights issue, open market stock repurchases and cash dividends can generate real cash outflow.Based on the fact that investors's valuation on company have largely shifted from static index analysis towards paying more attention on company's cash flow change. Greater impact on cash flow impact by dividends and shares buyback decision,thus managers will be more careful for decision-making about cash dividends and buyback. Stock repurchase is different with cash dividend on two aspects:First, timing of the repurchase have more freedom, generally within the announced period of 3-6 months at any time.Rrepurchase operation requires only periodic report about repurchase procedure last month.Second,actual implementation of buyback announcement c is not mandatory execution. Third,from a multi-year perspective, dividends are more sticky than repurchase. From the perspective of cash outflwo to investors, they are alternatives.Selection between cash dividends and share repurchase depend on company features:temporary cash flow distributed by repurchase, companies with more operation risk prone to have repurchase.Repurchase announcement usually accompanied with poor market performance, the market reaction for open market repurchase announcements is becoming rational.Characterised with repurchase motivation, industry, time distribution,can summarize the completed open market repurchase up to December 31,2015 have traits like:repurchase concentrated in the manufacturing, electricity, real estate, construction and other asset-heavy industries, these industries tend to think they are undervalued. Repurchase to solve major shareholder funds appropriation the equity division reform concentrated in 2005-2006, and is the industry commonly used way too. Company Merger and Reorganization or performance compensation agreement repurchase are occasional. After 2010, the open market repurchase and repurchase equity incentive case occupy the mainstream.First share repo companies have features like:more uncentaity, higher operational risk and higher payout ratio and market to book value ratio. During the repurchase year, the dividend payout ratio decreased and repurchase replaced dividend. The actual extent completing of repurchase committment is affected by company cash flow's sufficiency. Companies lack cash flow tend to eat its promise.Companies repurchase shares out of undervalue incentive,are not just because of speculation on market, but also includes judgments about company's intrisic value. Lower the rate of return last quarter, higher the proportion of managerial ownership, greater the risk of the company's operations which represented by operating profit variance, more inclination company to use share repurchase as a replacement to cash dividends.Companies with higher operating cash flow are more likely to increase the total cash payout. Market to book ratio, institutional holdings, debt to asset ratio not statistically significant. Evidence support financial flexibility thesis, stock undervaluation thesis, management selfish hypothesis.In addition, the buyback announcement have significant short period positive effects. Before and after the repurchase announcement 1day, there is a significant positive abnormal return, after the repurchase announcement2 days such effect disappeared or be corrected quickly. Most of the cumulative abnormal return source from publication of the repurchase announcement. To invest during or after the repurchase announcement, though inferior to intervening before the repurchase announcement to obtain 3% cumulative abnormal rate of return,it is still a safe and effective investment strategy.