Corporate Share Repurchases ICAS

Corporate Share Repurchases: The Perceptions and Practices of UK Financial Managers & Corporate Investors
Corporate Share Repurchases: The Perceptions

and Practices of UK Financial Managers and
Corporate Investors
The recent financial crisis has brought to an end the extensive share
repurchase activity seen in the last 25 years in UK listed companies. At
the moment it is difficult to see when and if share repurchase activity will
increase and what the repercussions will be for companies who have bought
back their shares in recent years.
This research study, which started before the credit crunch, investigates
Corporate Share Repurchases:
the motivations for share repurchases and the perceptions of their use by
both the corporate and investor community. The findings of this research
The Perceptions and Practices
may act as a useful guide in this new uncertain future as to whether share
repurchases will continue to be used and, if so, in what circumstances and
of UK Financial Managers and
by which companies.
Corporate Investors
The study uses a survey approach to obtain the views of managers of
investment and non-investment companies and the investor community. Researchers: Alpa Dhanani
Perceptions on the motivations for share repurchase activity are compared Roydon Roberts
and contrasted as well as reflections on the role of regulation. The report
concludes with four policy implications for managers and investors to
consider.
ISBN 978-1 904574-545

EAN 9781904574545
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Dhanani Covers - Oct 09.indd 1 16/11/2009 16:34

CORPORATE SHARE REPURCHASES:
THE PERCEPTIONS AND PRACTICES OF UK FINANCIAL
MANAGERS AND CORPORATE INVESTORS
by
Alpa Dhanani
Roydon Roberts
Cardiff University
Published by
The Institute of Chartered Accountants of Scotland

CA House, 21 Haymarket Yards
Edinburgh EH12 5BH
Dhanani Report - 2009.indd 1 12/11/2009 13:46:08

First Published 2009
The Institute of Chartered Accountants of Scotland
2009
ISBN 978-1 904574-54-5
EAN 9781904574545
This book is published for the Research Committee of

The Institute of Chartered Accountants of Scotland.
The views expressed in this report are those of the authors
and do not necessarily represent the views of
the Council of the Institute or the Research Committee.
No responsibility for loss occasioned to any person acting

or refraining from action as a result of any material
in this publication can be accepted by the authors or publisher.
All rights reserved. No part of this publication may be

reproduced, stored in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical, photocopy,
recording or otherwise, without prior permission of the publisher.
Printed and bound in Great Britain

by T. J. International Ltd.

C ontents
List of Abbreviations ..................................................................... i

Foreword ...................................................................................... iii
Acknowledgements ........................................................................ v
Executive Summary ...................................................................... vii
1. Introduction .......................................................................... 1
The context of the research study ................................................. 1
The research questions ................................................................. 11
Structure of the report ................................................................. 11
2. Literature Review .................................................................. 13

Introduction ................................................................................ 13
Theoretical motivations underlying the use of share repurchase
programmes ................................................................................. 14
Repurchases by investment companies ......................................... 21
Prior empirical research ............................................................... 24
Summary ..................................................................................... 33
3. Research Methods ................................................................. 35

Introduction ................................................................................ 35
Research approach ....................................................................... 35
Questionnaire responses .............................................................. 41
Summary ..................................................................................... 43

Contents
4. Financial Managers of Non-Investment Companies ................ 45

Introduction ................................................................................ 45
Respondent characteristics ........................................................... 45
Motivations for share repurchase programmes .............................. 50
Motivations underlying actual share repurchases .......................... 59
Reasons for decisions not to participate in share repurchase
programmes ................................................................................. 62
Non-investment companies and regulation .................................. 63
Summary ..................................................................................... 64
5. Financial Managers of Investment Companies ......................... 67

Introduction ................................................................................ 67
Motivations underlying actual share repurchases .......................... 78
Reasons for decisions not to participate in share repurchase
programmes ................................................................................. 80
Investment companies and regulation .......................................... 81
Summary ..................................................................................... 81
6. The Views of Investors ............................................................ 83

Introduction ................................................................................ 83
Regulation surrounding share repurchases in the UK ................... 101
Summary ..................................................................................... 103

Contents
7. Conclusions ............................................................................ 105

Introduction ................................................................................ 105
Motivations for share repurchases: non-investment companies .... 105
Motivations for share repurchases: investment companies ............ 107
Motivations for share repurchases: investors ................................. 108
Reflections into the role of existing UK repurchase regulation ..... 109
International comparison ............................................................. 110
Policy implications ...................................................................... 110
Limitations and areas for future research ...................................... 111
Summary ..................................................................................... 112
References ...................................................................................... 113
Appendix 1 Views of financial managers of non-investment

companies ..................................................................... 117
Appendix 2 Views of financial managers of investment companies 123
Appendix 3 Views of investors .........................................................
129
About the Authors ........................................................................
135

L ist of Abbreviations
AIM Alternative Investment Market

BHR Buy and hold returns
DPS Dividend per share
DRIP Dividend reinvestment plan
EPS Earnings per share
ESOPS Employee share ownership plans
ESOs Employee stock options
FAME Financial Analysis Made Easy
FSA Financial Services Authority
ICTA Income and Corporation Taxes Act
LSE London Stock Exchange
NAB Net asset backing
NAV Net asset value
OEICs Open ended investment companies
S&P Standard & Poors
SIC Standard industry classification
UK United Kingdom
UKLA UK Listing Authority
UKSA UK Shareholders Association
US The United States of America

F oreword
the moment it is difficult to see when and if share repurchase activity
will increase and what the repercussions will be for companies who have
bought back their shares in recent years.
This research study, which started before the credit crunch,
investigates the motivations for share repurchases and the perceptions of
their use by both the corporate and investor community. The findings
of this research may act as a useful guide in this new uncertain future
as to whether share repurchases will continue to be used and, if so, in
what circumstances and by which companies.
The study finds that the motivations for share repurchase activity
differ between investment and non-investment companies. For
non-investment companies the major motivation is to return cash to
shareholders whereas for investment companies the major motivator is
management of the Net Asset Value (NAV) per Share and the resultant
discount to NAV. Non-investment companies do not use share
repurchases to replace regular dividend payments and there is only
marginal support from investors and corporates that share repurchases
increase share price.
In terms of regulation, interestingly with hindsight, some investors
believed that share repurchase activity had spiralled out of control and
some thought that there was a need for further regulation. Corporates
however generally believed that the current level of regulation was
appropriate.

iv Foreword
This project was funded by the Scottish Accountancy Trust for

Education and Research (SATER). The Research Committee of The
Institute of Chartered Accountants of Scotland (ICAS) has also been
happy to support this project. The Committee recognises that the views
expressed do not necessarily represent those of ICAS itself, but hopes
that the project will add to the knowledge about share repurchases in
these uncertain economic climes.
David Spence
Convener, Research Committee
November 2009

A cknowledgements
The authors wish to express their gratitude to all the participants in

the survey, all those who acknowledged the survey but were unable
to participate in it and also the three individuals who kindly agreed
to participate in the interviews. The authors also acknowledge the
support from The Institute of Chartered Accountants of Scotland; and
the insightful comments from the two anonymous reviewers and the
Director of Research at ICAS, Christine Helliar and those who agreed
to participate in the pilot study. In addition, the authors would like
to thank Michelle Crickett, the Assistant Director of Research at ICAS
and Angie Wilkie, the Research Co-ordinator at ICAS for their efforts
in arranging the interviews and involvement throughout the study.
Finally, the Research Committee and the researchers are grateful
for the financial support of the Trustees of the Scottish Accountancy
Trust for Education and Research, without which the research would
not have been possible.

E xecutive Summary
Share repurchase activity became a global phenomenon in the late

twentieth century. Previously restricted largely to the US, repurchase
programmes have been widely adopted in Europe and other countries
such as Japan. In 2005, the global volume of share repurchase
programmes was estimated at approximately US$400 billion (Vermaelen,
2006). In the UK, where share repurchase programmes were legalised
in 1981, activity grew extensively and by 2006, it is estimated that
British companies spent a record 46 billion on buying back their
shares compared with the annual spend of 10 billion during the late
1990s. Further, the UK exhibited a significant rise in the percentage
of companies engaged in share repurchase programmes and at the start
of the twenty first century, the volume of activity in companies listed
on the London Stock Exchange and the Alternative Investment Market
exceeded that of their counterparts listed on the US stock exchanges
(Scholey, 2007).
Since 2007, however, market conditions in the UK and globally
have changed markedly as a result of the global financial crisis: major
western economies have moved into recession, and there has been an
unprecedented number of companies that have issued profit warnings,
and filed for bankruptcies. Finance for companies has been characterised
by a paralysis in the money markets and as a consequence, the growth in
share repurchase activity has rapidly reversed. In the US, for example,
share repurchases by S&P 500 companies in the third quarter of 2008
were 44% down on the same period in 2007 (Prince, 2008) and a similar
trend was experienced in the UK FTSE 100 companies, who for year
ends between June 2008 and March 2009 reported a fall of some 43%
compared to the same period the previous year.

viii Executive Summary
Notwithstanding the reversal in growth, share repurchases continue

to be an important financial management tool for companies. Indeed,
despite the fall of nearly one half between 2007 and 2008 US share
repurchases continue to far exceed dividend payments (Prince, 2008).
The motivations underlying them and their impact on company value
therefore remain of significant interest, and two key interrelated questions
that have arisen as a result of the surge in share repurchase activity are:
(i) in what capacity are share repurchase programmes used; and (ii) why
did activity in the UK soar after legalisation up until the financial crisis,
and throughout the world, more generally? Several motivations have
been put forward to explain the use of share repurchase programmes by
companies, including:
substituting for regular or special dividends;

signalling future performance and/or current undervaluation of
shares to the markets;
optimising the capital structure of companies;
managing principal-agent problems;
reallocating capital in the markets efficiently;
influencing reported financial performance;
protecting against potential takeovers; and
influencing share prices and managing the market liquidity of
companies shares.
Prior empirical research has presented mixed and ambiguous results

in relation to the usefulness and value of repurchase programmes, and
the subject area remains relatively under-researched in comparison to
other areas of financial management.

Executive Summary ix
In this context, using a survey approach, this report seeks to examine

UK managers and investors views in relation to the motivations
underlying, and factors influencing, the use of share repurchase
programmes in UK listed companies. Specifically, it:
captures the views of managers of both repurchasing and non-

repurchasing companies on the general motivations underlying share
repurchases and, where appropriate, the specific reasons for actual
repurchases;
distinguishes between the views of managers of share repurchasing
and non-repurchasing companies to help explain the differences in
practice, and why repurchase programmes are not adopted universally;
examines the views of financial managers of both investment
companies and non-investment companies separately in recognition
of the different circumstances and characteristics of the respective
organisations; and
ascertains the views of the investor community to facilitate a
comparison of the views and perspectives of investors with those of
managers.
The results of the survey, based on usable responses from an

individual from 97 non-investment companies, 53 investment companies
and 57 investors are discussed below. For the purposes of this survey
investment companies were defined as those which invest in a diversified
portfolio of assets such as shares and securities of other companies; more
specifically those included on the equity investment instruments and non-
equity investment instruments sectors on the London Stock Exchange.
To supplement the survey findings, interviews were undertaken with
three individuals from the pension fund and investment fund sectors.
The number of interviews undertaken was limited due to a reluctance
amongst institutional investors to be interviewed during a period of
significant market turbulence.

x Executive Summary
Motivations underlying the use of share repurchases:

non-investment companies
Open market share repurchase programmes, generally financed

by existing cash balances, dominate repurchase activity by non-
investment companies in the UK.
Repurchase programmes appear to be motivated by a desire to return
excess cash flows to shareholders, and this perhaps serves to explain
the fall in activity during the financial crisis when liquidity in the
markets has become a major concern. Other factors that encourage
repurchases include: a wish to influence reported earnings per share
(EPS) levels; signal undervaluation to capital markets; optimise
companies gearing ratios; and management believe that the primary
beneficiaries of such programmes are shareholders.
Share repurchases, it is clear, are not used to replace regular dividend
payments and appear to arise from a different set of circumstances
and situations than dividend payments. Moreover, they are not
used because they are considered to be fashionable, or an emerging
trend in the markets. Just over one quarter of companies use them
to influence their share prices.
Overall, a select group of reasons listed above appear to drive UK
repurchase activity, although in most companies, a multiplicity of
factors, rather than a single reason, appear to be responsible.
The views of managers of companies engaged in repurchasing activity
are broadly in line with the general views of managers of both
repurchasing and non-repurchasing companies. However, there are
some differences in the opinions expressed; for example, although over
half the companies generally agreed that signalling undervaluation
and facilitating capital reallocation in the markets underlie repurchase
programmes, only a small minority of repurchasers cited them as
influencing their particular repurchases. Similarly, whilst repurchases
are seen in general as a substitute for special, although not regular,

Executive Summary xi
dividends only four repurchasers cited dividend substitution as

motivating their particular repurchase activity.
There appears to be little difference between the views of managers
of repurchasing and non-repurchasing companies in relation to
the general motivations underlying repurchases, suggesting that
differences in perceptions between the two groups do not explain
why this method of cash disbursement is used. Rather, the lack of
funds to engage in repurchase activity and concern about adverse
shareholder responses appear to explain the absence of participation
by non-repurchasing companies in repurchase schemes.

Investment companies
Investment companies also rely heavily on open market share

repurchases, although tender offers are also used.
The main factors contributing to the use of share repurchase
programmes among repurchasing investment companies appear
to be the management of Net Asset Value per Share (NAV) and
discount to NAV, both of which are specific to investment companies.
Managing market liquidity is also an important factor for investment
companies, in contrast to non-investment companies.
Once again the specific motivations identified by repurchasing
companies are consistent with the views expressed in general terms
by both repurchasing and non-repurchasing investment companies.
Further, the views of managers of repurchasing and non-repurchasing
investment companies are very similar, and any differences generally
relate to the strength with which the views are held. Repurchasing
companies expressed stronger views: agreeing more strongly with
statements that generated positive overall responses and disagreeing

xii Executive Summary
more strongly with statements that were unfavoured. As with non-

investment companies above, these results indicate that decisions to
engage in/refrain from share repurchases are not a result of differences
in perceptions of such programmes between repurchasing and non-
repurchasing companies; rather, the absence of significant benefits
from such programmes for the respective companies and/or the
associated costs contribute to the lack of activity.

Investors
Comparing investor views with those of managers, a number of

reasons for using share repurchase programmes attracted more
managerial support than investor support, and equally there were a
few that attracted more investor support than managerial support.
Only one area, that relating to the impact of share repurchase
programmes on corporate share price, generated closely synchronised
views between management and investors. Specifically, both groups
only marginally supported the views that share repurchases increase
share price, and believed that changes to company value, if any, were
likely to be gradual and over a long-term period.
Reasons that attracted relatively more managerial support include:
capital reallocation in which surplus funds are returned to investors
in the absence of value enhancing projects; the flexibility of share
repurchase programmes and their substitutability in relation to
special dividends; the role of share repurchase programmes in
influencing corporate gearing levels; and the signalling of both share
price undervaluation and expectations of future income.
Areas that attracted relatively more investor attention/support
included: the notions that share repurchase announcements enable
companies to generate publicity in the markets; that repurchase
programmes may be used to influence total future dividend payout
levels; and that repurchase programmes may be an emerging trend in

Executive Summary xiii
the capital markets. Moreover, investors provided more support for

the view that share repurchase programmes mitigate the principal-
agent problem by reducing opportunities for management to engage
in behaviours which benefit themselves at the expense of investors.
Nevertheless, the interviewees also highlighted the potential of such
programmes to exaggerate principal-agent concerns by influencing
EPS levels upon which managers are evaluated, and indeed investors
in the survey identified managers, bankers and advisors as significant
beneficiaries of such programmes, alongside shareholders.
These differences in managerial and investor views above question:
(i) whether managerial action through share repurchase programmes
gives rise to the intended investor reaction; and (ii) whether investors
approve the use of share repurchase programmes for the same reasons
as management.
Perceptions in relation to regulation surrounding

share repurchase activity in the UK
Investors and corporate managers alike believe that the current

regulation under which share repurchase programmes in the UK are
undertaken adds credibility to such programmes and also provides
an opportunity to educate shareholders.
Focusing on specific regulation, sub-groups of both investment
companies and non-investment companies report that the listing
requirements surrounding the volume, pricing and/or timing of
repurchase programmes restrict the usefulness and value of share
repurchase programmes, and this view is indeed shared by some of
the investors. In relation to regulation concerning the reporting
requirements to the Financial Services Authority and the opportunity
to hold treasury shares, neither managers (from both investment
companies and non-investment companies) nor investors consider
such regulation to be restrictive.

xiv Executive Summary
Addressing shareholder involvement in the approval process for

share repurchase programmes, financial managers broadly believe
that this requirement does not curb corporate activity. At the same
time investors, on average, appear to believe that they are playing a
relevant role and that their current level of involvement is valuable.
A small group nevertheless believe that share repurchase activity
has spiralled out of control and that more regulation is required to
protect shareholder wealth; unsurprisingly this view is not shared
by corporate managers.
International comparisons
On comparing the motivations that influence repurchase activity in

UK companies, with those reported in prior Australian and US surveys,
there are some notable differences. UK companies tend to emphasise
the need to return surplus cash to investors and adjust gearing levels
while their Australian and American counterparts emphasise the need
to influence reported EPS levels, and purchase undervalued shares in
order to effect share price changes. These differences may be a result of
the stringent regulatory environment in the UK in which timing and
volume restrictions limit the opportunity to signal undervaluation and
directly influence share price. As such, regulation in the UK appears to
be having the desired effect: to curb repurchase activity which seeks to
influence company share price. However, management, in general, do
not feel restricted by the regulation.
Other contributory factors for the differences in results, compared
to Australian and US companies, may stem from the different time
periods of the surveys in each country which reflect different market and
operational conditions. For example, recent developments in corporate
governance activities may be responsible for encouraging companies to
return surplus cash to their shareholders.

Executive Summary xv
Implications
The policy implications arising from this study are:
Managers and more importantly, non-executives with their fiduciary

responsibilities, need to carefully assess recommendations from
bankers and advisors in relation to share repurchase programmes
because, as highlighted in the investor survey, they stand to gain
from such programmes and thus their advice may lack objectivity.
When managers use share repurchase programmes to capitalise

on those characteristics which distinguish them from other
distribution methods, they should emphasise the particular benefits
such programmes generate which are, or may not be, provided by
alternative distribution methods. A more extreme version of this,
as suggested by the UK Shareholders Association (UKSA) and
supported by one of the interviewees in the study, is that regulation
that requires companies to justify their use of share repurchase
programmes over alternative distribution methods should be put
in place.
In addition, as suggested by one of the interviewees, to demonstrate

good practice, management might report on the outcome of share
repurchase transactions post-event to demonstrate the value of such
programmes for investors. The UKSA once again holds a more
stringent view and believes that regulation should be put in place
to enforce such practice.
Finally, from a shareholder perspective, while investors seek to

discount the impact of share repurchase programmes on EPS levels
to determine the true level, managers may nevertheless be inclined
to attempt to manipulate this ratio if their reward structures are
tied to it. Indeed, as seen in the investor survey, managers are seen
to be significant beneficiaries of such programmes and thus, where
appropriate, investors should campaign for a change in such reward
structures.

1 Introduction
The context of the research study
Share repurchase activity became a global phenomenon at the end

of the twentieth century. Previously restricted largely to the US,
repurchase programmes were widely adopted in Europe as well as in
other countries such as Japan. In 2005, the global volume of share
repurchase programmes was estimated at approximately US$400 billion
(Vermaelen, 2006). At the turn of the century, in the US alone, corporate
expenditure on share repurchases as a percentage of earnings was ten
times higher than it was in the early 1980s; indeed during the late
1990s US companies for the first time spent more money repurchasing
their shares than on paying dividends (Grullon and Michaely, 2002).
This wave of share repurchase programmes continued to persist during
the early years of the 21st century, and in the second quarter of 2005
share repurchases by US companies included in the Standard & Poors
(S&P) 500 index totalled $82 billion, 92% higher than that over the
same time period in the previous year (Postelnicu, 2005) and by the
second quarter of 2007, activity had risen to $157 billion (Prince, 2008).
Elsewhere, where repurchase activity was traditionally discouraged or
even prohibited, repurchases have flourished, and after 2000 the number
of share repurchase announcements made by non-US companies has
exceeded that made by US companies (Vermaelen, 2006).
In the UK, repurchase activity was introduced and legalised in
1981 and rose to an annual spend of 10 billion in the late 1990s,
approximately eight times higher than that a decade earlier (Lasfer,
1998). Repurchase activity continued to soar during the first few years
of the 21st century, and it is estimated that in 2006 British companies

2 Corporate Share Repurchases
spent a record 46 billion on buying back their shares (Durrant, 2007),

a remarkable growth rate of 64% on the previous year, and a notable
comparison to the annual dividend spend of 62 billion in the same
year (Connon, 2007). Whilst giants such as Vodaphone, Shell and BP
were deemed to be responsible for a significant proportion of repurchase
activity (a combined repurchase value of 21 billion in 2006), the
percentage of companies engaging in share repurchase programmes
increased threefold between 1998 and 2007 (Hasell, 2007). Moreover
Scholey (2007) reported that, at the turn of the century, the volume of
activity in companies listed on the London Stock Exchange (LSE) and
the Alternative Investment Market (AIM), for the first time, was higher
than that of their counterparts listed on the US stock exchanges.
Since 2007, however, market conditions in the UK and globally
have changed markedly as a result of the global financial and economic
crisis. The major western economies have moved into recession, with the
UK gross domestic product (GDP) suffering five successive quarters of
declining up to June 2009 and an overall fall of 5.7%. There has been
an unprecedented number of companies that have issued profit warnings,
and a large number of bankruptcies, vividly demonstrating heightened
distress in the economy. The credit crunch has created extraordinary
volatility in UK and world financial markets. The value of the FTSE
100 index fell from over 6700 in October 2007 to under 3800 a year
later, and after rallying to over 4600 in January 2009 fell back below
3500 in March 2009 before recovering to over 4700 by August 2009.
Corporate finance has been characterised by a paralysis in the money
markets with liquidity concerns even amongst the top-end companies.
Management have found it difficult to obtain debt finance, and with the
volatile and disturbed state of the FTSE index, they have also struggled
in the equity markets.
In the light of these changed economic and financial conditions,
the growth in share repurchase activity was rapidly reversed. In the US,
for example, share repurchases by S&P 500 companies in the second
quarter of 2008, at $89 billion, were 44% down on the same period in

Introduction 3
2007 (Prince, 2008). A similar reversal of growth was experienced in

the UK, for example; share repurchases reported by companies included
in the FTSE 100 index, for year ends between June 2008 and March
2009, were approximately 22 billion, some 43% below the figures
reported a year earlier (approximately 38 billion). At the same time,
many companies were also cutting dividend payouts, with one forecast
suggesting that dividend payouts by UK companies in 2009 would be
13% lower than in the previous year (Jones, 2009).
Notwithstanding the reversal in growth, share repurchases continue
to be an important financial management tool for companies. Indeed,
despite the fall of nearly one half between 2007 and 2008 US share
repurchases continue to far exceed dividend payments (Prince, 2008).
The motivations underlying them and their impact on company value
therefore remain of significant interest.
Two key related questions that arise in relation to share repurchase
programmes are: (i) in what capacity are they used; and (ii) why did
repurchase activity soar after they were legalised up until the credit
crunch in the UK, and also more generally? Notwithstanding the surge
in repurchase activity in the UK and elsewhere, the impact of repurchases
on company value, and, in turn, shareholder wealth, remains ambiguous,
and compared to the impact of dividend policy on company value,
relatively under-researched.
Given the financial objective of maximising shareholder wealth,
then, as companies invest in value-generating projects to enhance their
market values, two key considerations arise: (i) how can these companies
return the wealth/income generated to their shareholders; and (ii) does
the wealth return process itself serve to enhance company value? In
relation to the former question, methods of wealth distribution in
addition to share repurchase programmes include: regular cash dividend
payments; special dividend payments; scrip dividends; and dividend
reinvestment plans (DRIPs). The latter question in relation to share
repurchase programmes is addressed in chapter two. Discussion of share

repurchases in the financial management literature has principally been

subsumed in the discussion of dividend policy, although as discussed in
the next chapter it also features in discussions of corporate restructuring.
Share repurchases, often referred to as share buy-backs, are the
repurchase of the existing shares of a company by the company itself. They
enable companies to return wealth to shareholders in exchange for their
shares. The shares repurchased may subsequently be cancelled or re-used
at a later date. As a method of returning wealth to shareholders, share
repurchase programmes are akin to cash dividends, where companies, in
the UK, usually pay an interim dividend and a final dividend based on
year end results. Moreover, companies may supplement regular dividend
payments with special dividend payments which as one-off payments are
usually made when companies have generated an additional income that
does not form a part of their regular activities and management want to
convey to the markets that such payment will not recur regularly as the
source of the income is unlikely to recur regularly. A critical difference
between share repurchase programmes and cash dividends lies in the fact
that shareholders receiving dividend payments receive a return without
a trade in exchange, that is, without a need to relinquish a part of their
shareholding. An additional consideration is whether share repurchase
programmes are analogous to regular cash dividends that are offered
to shareholders on a regular, routine basis or whether they imitate the
special, one-off dividend payments. Depending upon the context in
which they are used, representing either a longer-term commitment or
an occasional event, share repurchase programmes can have different
motivations.
Share repurchase programmes can also be compared to the two
additional methods with which to return wealth to shareholders: namely
scrip dividends and DRIPs. Scrip dividends offer investors a choice of
company shares in place of a cash dividend, although shareholders are
not obliged to take them up, while DRIPs entail a cash payment to
shareholders as a dividend which is subsequently exchanged for new
company shares. An immediate advantage of scrip dividends and DRIPs

Introduction 5
to companies is that they do not necessarily entail a payment of cash

and they enable relatively illiquid companies to offer their shareholders
a return and allow growth companies to retain corporate income
for future investment projects. However, although share repurchase
programmes are comparable to scrip dividends and DRIPs in that they
offer shareholders a proportional return of their wealth, in another sense
they are effectively an antithesis to scrip dividends and DRIPs in that
they entail buying back shares rather than issuing new shares, and using
up cash resources rather than avoiding the payment of cash returns.
Indeed companies may engage in repurchase programmes as a method
with which to acquire shares for redistribution as scrips and DRIPs.
In practice, share repurchase programmes may be enacted in a
number of different ways including the use of open market repurchases,
fixed price tender offers, Dutch tender offers and private arrangement
repurchases. Open market repurchases are the most popular form of
repurchase programmes and represent some 90% of all share repurchase
activity (Oswald and Young, 2004). Companies repurchase shares from
current sellers in the open market either directly or through a broker.
Repurchases in this manner are generally the cheapest way to reacquire
shares, although there are often timing, volume and pricing restrictions
imposed upon them, the result of which may be that the process of
repurchase may be slower, and the impact of the repurchase, smaller.
Fixed-price tender offers are situations in which a company tenders
to buy a specific number of shares at a stated price by a certain date
from existing shareholders and interested shareholders participate in
the repurchase programme. There are generally no specific volume
restrictions imposed under this method, and companies can make
relatively large changes to their outstanding shares in a short span of
time, although there is a possibility that the programme will be under-
subscribed and the desired impact will, in turn, be reduced. On the
contrary, there also remains a possibility that the repurchase programme
is oversubscribed in which case management may either increase the

number of shares to be repurchased, or acquire shares from interested

parties on a pro-rata basis.
The Dutch tender offer, a relatively new approach, is a more
sophisticated version of the fixed-price tender offer; companies specify
a range of prices at which they are willing to repurchase shares and seek
views from investors of the price(s) they are willing to accept. Together
with indicating a potential selling price, shareholders state the number
of shares that they are willing to tender. At the close of the offer period,
management determine the final price by totalling the number of shares
tendered, starting from the lowest price range, until they reach the
number of shares intended to be acquired. The final price, the clearing
price, is paid to all sellers offering the price itself and all those offering
a price lower than it; all sellers tendering at a price higher than the
clearing price are excluded from the deal. The advantage of a Dutch
tender over a fixed-price share repurchase is that there is a chance that a
company can acquire the shares at a lower price than it may itself have
set under a fixed-price tender since pessimistic shareholders, who expect
the market share price to fall, will sell their shares at prices at the lower
end of the range specified.
Finally, companies can make arrangements with large investors
to engage in private transactions. It is possible that investors in this
case may be in a poor negotiating position because they will tend to
participate in such schemes when they need to enhance the liquidity of
their investments. Private arrangement repurchases, while popular in
the US where repurchase activity first gained momentum are becoming
increasingly uncommon (Vermaelen, 2006).
As mentioned above, share repurchase activity in the UK was
legalised in 1981. Currently it is governed by the Companies Act 2006
and the UK Listing Authority (UKLA) Listing Rules. While regulations
pertaining to repurchase activity are more stringent than those in the
US, where the origins of repurchase programmes lie, they are closely
aligned to those of other large stock markets (as shown in Table 1.1,
adapted from Kim et al., 2005).

Introduction 7
Regulation surrounding repurchase activity in the UK can be

broadly categorised into three groups:
(i) operational requirements set-up by the UKLA and from the

Companies Act;
(ii) conditions agreed with shareholders; and
(iii) reporting requirements as set out by the UKLA.
Regulation principally protects shareholder interests by preventing

companies from influencing market behaviour through large transactions
and/or inflating share prices through purchases at a premium and
preventing insider trading during periods of high information asymmetry
which may benefit management at the expense of shareholders.
Statutory regulations permit companies to repurchase their shares
without limit subject to the overriding requirement that the company
must retain a minimum share capital. However, for open market
repurchases, according to the UKLA, the repurchase volume cannot
exceed 15% of the number of shares outstanding of any class of equity;
if it does, then the repurchase is treated as a tender offer repurchase
(Kim et al., 2005). In addition, the repurchase price for open market
repurchases cannot exceed 105% of the average share price five days prior
to the repurchase day and companies can also not engage in repurchase
activity during close periods, periods during which information
asymmetry between managers and investors is at its highest and during
which managers themselves are not allowed to trade for similar reasons.
Close periods are defined as periods of one or two months immediately
preceding the preliminary announcement of companies annual results.
Furthermore, directors and managers are not allowed to trade shares
when a repurchase is underway. Moreover, until recently, companies
were required to cancel all the reacquired shares immediately after the
reacquisition and were not allowed to hold them as treasury shares.

This rule prevented companies from holding shares as treasury shares

for reissue as employee stock ownership schemes (ESOPs) and other
similar programmes/purposes and also prevented companies from buying
shares at a cheaper price and selling them at a higher price. If companies
wanted to use share re-acquisitions for ESOPs, management had to set up
wholly-owned independent trusts that engaged in repurchase activity for
this purpose only, and re-acquisitions in this manner were not classified
as share repurchases. This situation changed in December 2003 so that
companies are now able to hold up to 10% of any class of listed shares as
treasury shares, although regulatory and disclosure requirements remain
extensive (Freshfields Bruckhaus Deringer, 2003).
In addition to operating within the rules specified above, UK
companies can only engage in repurchase activity subject to formal prior
approval from shareholders to do so. Shareholder approval is valid for a
period of 18 months and is normally sought at annual general meetings.
Specific terms and conditions under which repurchase activity can take
place are also agreed and include issues such as:
(i) the purpose for which the programmes will be used;

(ii) the maximum volume of shares that can be repurchased;
(iii) the minimum - maximum price range at which they can be
repurchased; and
(iv) any other considerations that shareholders may deem appropriate.
Finally, companies engaged in repurchase activities need to adhere to

tight disclosure requirements. First, an open market repurchase decision
has to be reported immediately to the Financial Services Authority (FSA)
acting as the UKLA. Second, once the repurchases have been made, these
too must be reported to the UKLA as soon as possible and no later than
7.30 am on the following business day. Information which is required
to be disclosed comprises the date of the purchase, the number of shares

Introduction 9
repurchased, and the highest and lowest purchase prices in a day. Finally,
companies are required to disclose the volume of repurchase activity and
average prices of repurchases in their annual reports.
Table 1.1 reveals that, in marked contrast to repurchase arrangements
in the UK, there are few regulations and restrictions in the US.
Table 1.1 A summary of repurchase regulation in the ten largest

repurchase markets around the world
Regulatory categories
Shareholder Timing Price Volume Disclosure Insider
Country approval restriction restriction restriction requirement trading
UK
US x x x x x x
Japan x
France
Germany x
Canada x
Italy x
Netherlands x
Switzerland
Hong Kong x
Notes:
and x indicate the presence and absence of regulation in each country for each individual
regulatory category, although does not capture the exact nature of regulation.
Adapted from Kim et al. (2005).
Specifically in the US there are no restrictions on timing, volume

or pricing levels at the time of repurchase programmes; company boards
are in a position to take repurchase decisions without prior approval
from investors; companies do not have to make any special disclosures

in relation to repurchase activity; and insiders can participate in the

repurchase programme as shareholders. In comparison, regulation
in the UK is more closely aligned to other major markets, although
it is important to note that there are differences in the specificity and
strictness of the regulations. In some instances, UK regulation is more
stringent than that of other markets, and in others, it is less so. In the
former case, for example, insiders in Canada may engage in trading
activity when a repurchase is underway although the details need to
be disclosed publicly. However, in relation to volume restrictions, in
countries such as France and Italy, in addition to having controls on
the allowable total volume of repurchases there are also restrictions on
the daily level of repurchases. Similarly, for price restrictions, in France
repurchases cannot be made at a price higher than the daily high.
Even though repurchase regulation in the UK is amongst the
most stringent globally, the UK Shareholders Association (UKSA), an
independent organisation representing the interests of private shareholders
in the UK, is campaigning for further regulation (UKSA, 2002). While
accepting the usefulness of share repurchases, the organisation is seeking
further regulation to protect private shareholders whom, it believes,
may be potentially disadvantaged. Its recommendations include: an
explicit statement with each repurchase activity to explain exactly the
reasons underlying the individual repurchase activity; identification
and disclosure of any potential problems or risks that may arise with
the repurchase; a justification of the use of repurchase programmes over
all alternative distribution methods; confirmation that the repurchases
are being used to benefit shareholders and not to enhance managerial
self-interests; and finally an overview of repurchase activity in annual
reports in which directors confirm the extent to which the repurchase
objectives set have been achieved (UKSA, 2002).

Introduction 11
The research questions
In the light of the recent surge in share repurchase activity in the

UK, together with the markedly different regulatory environment
within which programmes are enacted compared to the more highly
researched US based environment, the primary objective of this study
is to examine the motivations underlying, and factors influencing, the
use of share repurchases by listed companies in the UK. Further the
study also inquires into the views of the recipients of share repurchase
programmes, that is, investor groups. To this end, this study addresses
four key research questions:
(i) what are the general motivations underlying, and the factors that
influence, the use of share repurchase programmes;
(ii) what specific motivations and factors have driven actual repurchases
in the UK in recent years;
(iii) what role has regulation surrounding repurchase activity in the UK
played in shaping repurchase activity in UK companies; and
(iv) how do investor perspectives of share repurchase programmes
compare to managerial perspectives?
Structure of the report
The remainder of the report is structured as follows. Chapter

two presents a literature review of why companies may engage in share
repurchase programmes. Chapter three presents the details of the survey
approach employed in this project, and chapters four to six present
the results of the survey. Specifically, chapters four and five examine
repurchase activity in non-investment companies and investment
companies respectively, while chapter six compares the views of investors,

the recipients of share repurchase programmes, with those of financial

managers who are responsible for the repurchase enactments. Finally,
chapter seven presents the conclusions.

2 Literature Review
Introduction
Like any other financial activity, the principal aim of share repurchase
programmes is to enhance the market values of companies and in turn
the wealth of their shareholders. However, there may also be situations
in which managers act in their own self interests at the expense of
shareholders.
The seminal work of Miller and Modigliani (1961) on dividend
irrelevance forms the basis for the motivations underlying the use of
corporate share repurchase programmes. The authors showed that under
conditions of perfect and complete markets, financial managers cannot
alter the value of their companies by the way in which they distribute
income to shareholders; rather managers need to invest in productive
assets to enhance corporate market value. When the conditions of
perfect and complete capital markets are relaxed to reflect real world
situations, income distribution, and the approach to this distribution,
may become significant ways in which to enhance corporate market
value. Motivations for income distribution (regardless of the method
of distribution) include:
(i) signalling future performance;

(ii) enabling more efficient capital structure and investment decisions;
(iii) managing principal-agent problems;
(iv) supporting efficient capital reallocation; and
(v) meeting shareholder expectations.

Motivations supporting share repurchase programmes specifically

as a means of distribution include:
(i) signalling corporate undervaluation;

(ii) increasing gearing;
(iii) improving reported financial performance;
(iv) taxation reasons;
(v) accumulating shares for re-issue; and
(vi) managing takeover threats.
This chapter reviews each of the motivations in turn and presents

the prior empirical evidence related to them.
Theoretical motivations underlying the use of share

repurchase programmes
Motivations supporting income distribution
Income distributions using dividend payments and share repurchases

are interchangeable and can be used either to complement each other
or supplement each other.
Signalling future performance
A number of studies (Bhattacharya, 1979; Miller and Rock, 1985;

John and Williams, 1985) have examined whether income distribution
to shareholders is a signalling mechanism whereby companies manage the
information asymmetry between managers and shareholders. Managers
use regular dividend payments and/or share repurchases to indicate an
improvement in future cash flows and earnings. Authors argue that
regular income distribution represents a credible and a costly way with

Literature review 15
which successful companies can convey information to the markets to

differentiate themselves from their less successful counterparts. Regular
income distribution reflects the success of a company since it indicates
its ability to make this payment into the foreseeable future, without
recourse to external funds; managers are willing to commit themselves in
advance to income distribution because they know that the improvement
in future cash flows will serve to finance these distributions. At the
same time, payments also serve as costly signals because this ensures
that only the successful companies are able to afford this mechanism
to convey the positive information to shareholders. This cost aspect of
dividends has varied amongst different researchers. Miller and Rock
(1985), for example, emphasised the costs associated with the investment
opportunities forgone to make the payments to shareholders (or the
extra costs of funding to pursue these opportunities). Bhattacharya
(1979), on the other hand, proposed that income distribution is costly
for companies because it requires them to generate sufficient cash on a
permanent basis to support these payments.
Capital structure and investment decisions
Dividend policy, capital structure and investment decisions are

key elements of financial management. Companies can adjust one of
these three elements to influence and, in turn, optimise the other two.
A flexible distribution policy serves to optimise companies investment
decisions by enabling managers to retain income (for example, through
lower payout levels) for future investment and in turn enhance company
value. At the same time, a flexible distribution policy may also enhance
a companys capital structure (Megginson, 1997; Mitchell et al., 2001)
by enabling companies to access external sources of debt because debt
providers will be unlikely to be concerned with dividend payments/share
repurchases if they do not represent a fixed expense that companies have
to fulfil at regular intervals.

Managing principal-agent problems
Companies can use income distribution methods as mechanisms

with which to manage the agency costs between shareholders and
managers. In situations where companies have excess cash flow,
managers may be tempted to use the cash flow to further their own self
interests, at the expense of those of shareholders. Distribution policies
that enable companies to deploy this excess cash flow therefore serve to
prevent managerial self interest and protect shareholder wealth (Grullon
and Ikenberry, 2000). Distribution policies also increase the need for
companies to rely on external finance for future investments, and thus
increase the monitoring of managers by these extra external stakeholders.
Efficient capital reallocation
Even in the absence of agency costs, in situations where companies

have free cash flows with few investment opportunities, distribution
programmes that return excess capital to investors are valuable in that
they enable investors to reinvest their funds in alternative activities that
generate a return higher than companies are able to achieve (Grullon and
Ikenberry, 2000). Thus, in the absence of positive investment projects,
companies may engage in dividend payments (special dividends) or share
repurchase programmes to help enhance shareholder wealth.
Managing shareholder expectations
Shareholder expectations and preferences may also influence

distribution policy. Depending upon their individual circumstances
and expectations, shareholders or certain groups of shareholders may
have a preference for income redistribution or income retention and also
for specific types of distribution (see next section). In such instances,
companies may feel compelled to respond to such shareholder requests.

Situations underpinning shareholder views on distribution policies

include individual shareholders circumstances, taxation policies and
investors expectations. Shareholders may, for example, want regular
dividends or repurchase programmes because of their heavy reliance
on this income. Similarly, taxation regimes in which some distribution
policies are more tax efficient than others will influence shareholder
choices. Further, investors may believe that they are in a better position
to make capital investments than the companies in which they have
invested (Grullon and Ikenberry, 2000). A key consideration in relation
to corporate shareholders is that, depending on the characteristics of
individual shareholders and their circumstances, companies may face
conflicting demands from different groups of investors.
Share repurchases as a method of income distribution
A number of motivations support income distribution specifically

through share repurchases.
Signalling corporate undervaluation
When managers believe that the shares of their companies are

undervalued (Ikenberry et al., 1995), they may engage in repurchase
activity to signal market inefficiency and raise the share price. To
the extent that the market believes that managers repurchase shares
when they believe they are undervalued, repurchase programmes will
be perceived as signalling this undervaluation and may result in an
upward adjustment to the share price. In addition, to the extent that
management can repurchase shares without volume or price restrictions,
they can also influence and drive up the price of shares. Unlike dividend
payments, share repurchases enable companies to address undervaluation
directly by signalling undervaluation and influencing the share price.

The extent to which companies act on this motivation depends on

the regulations surrounding repurchase activity. In countries such as the
US, where there is very limited regulation, managers can readily engage
in such practice. In countries such as the UK, however, repurchase
regulation discourages managers from influencing and manipulating
share price rises. For example, there are restrictions on the timing of
repurchases, disallowing repurchases when information asymmetry is
likely to be at its highest. Similarly there are restrictions on the volume
of repurchases permitted and the prices at which shares can be purchased.
Increasing company gearing
Share repurchase programmes can also influence companies capital

structures in a more direct manner. Share repurchases reduce the value
of shares outstanding and therefore enable companies to increase their
gearing ratios as desired. A company that believes it is under-geared can
reduce its level of equity by repurchasing a proportion of its shares. To
the extent that companies use long-term debt to finance their repurchase
programmes, gearing ratios will adjust rapidly as levels of debt are
increased and levels of equity are reduced.
Improving reported financial performance
A repurchase programme reduces the market capitalisation of a

company and, in turn, increases a companys earnings per share (EPS)
(or prevents a decrease in EPS) as earnings are distributed across a smaller
volume of shares. Thus, companies seeking a growth in their EPS, or
attempting to prevent an EPS decrease, may repurchase a proportion
of their shares. In countries such as the UK and the US, in which
investors place more emphasis on the role of financial ratios including
EPS than investors elsewhere, companies may be more inclined to use
repurchase programmes to enhance their EPS. A similar argument

holds for companies financial positions as depicted by their net asset

backing (NAB) per share and dividend per share (DPS) (as long as
the total dividend paid remains constant). Alternatively, companies
have the opportunity to maintain the DPS and reduce the overall total
dividend payment.
Academics such as Grullon and Ikenberry (2000) oppose the use of
share repurchase programmes to influence companies EPS and market
share prices. They argue that any positive market reaction should not
be attributed to an increase in EPS, but rather to the impact of capital
reallocation, where excess funds have been returned to investors to pursue
a more effective investment strategy. The authors argue that the change in
EPS indicates an improvement in a companys productivity, but investors
may recognise this change as an attempt at window dressing if there is
no economic or financial basis for the improvement in productivity. In
a similar vein, Yang and Young (2007) argue that the EPS cannot be
the cause of better performance; rather repurchases serve to enhance
company value by enabling companies to reduce their agency costs by
returning free cash flows to investors.
Taxation
The gain on a share repurchase for an investor is taxed as a capital

gain. Because dividends and capital gains are treated differently for
taxation purposes in the UK, investors will have a preference for one
over the other. Thus taxation policy may lead shareholders to prefer
repurchases over other forms of distribution (or vice versa) and companies
may feel compelled to respond to this preference.
Taxation, in many countries is traditionally used as a tool with
which to discourage share repurchase activity. In the UK, for example,
pension funds for a time received tax credits on dividend payments but
did not on share repurchase programmes (Oswald and Young, 2004).
However, there are currently no special taxation provisions that hinder or

promote the use of share repurchase programmes. Tax legislation in other

countries has also been changed to make repurchases more acceptable
and, indeed, encourage repurchase activity. Kim et al. (2005), for
example, reported that new tax legislation in the Netherlands introduced
in 2001 reduced the tax costs of share repurchase programmes and in turn
enabled Dutch companies to participate in open market programmes.
Reissuing shares
Many companies offer share option schemes, bonuses, and

retirement programmes to their employees. In the UK, companies
were, until the end of 2003, unable to use share repurchase programmes
for this purpose because they were required to cancel all shares
immediately following a reacquisition. If share re-acquisitions were
used to operationalise their stock option schemes, management had
to set up wholly owned independent trusts that engaged in repurchase
activity solely for this purpose and re-acquisitions in this case were not
classified as share repurchases. Today, however, companies are able to
hold repurchased shares as treasury shares and subsequently reissue them
for this purpose.
Managing takeover threats
Companies can use share repurchase programmes to ward off

potential take-overs (Vermaelen, 2006). There are two interrelated
considerations. First, managers may make an attractive offer at which
to reacquire a companys shares and undermine the offer of an acquiring
company. Second, to the extent that pessimistic investors will opt for
repurchase programmes, the acquiring company may end up in a position
of having to offer a higher price to the remaining shareholders in order
to secure their support for the takeover.

Other reasons for share repurchases
Additional motivations underlying share repurchase programmes

include fads and fashions. The fashion may stem from their heightened
use in the US and by larger UK companies. Moreover, share repurchase
programmes enable companies to influence market liquidity, holding
their shares back or supplying them to the market for resale. Finally,
Mitchell et al. (2001) argue that share repurchase programmes may
be more suitable in conditions of an economic downturn than during
periods of high growth. One possible reason for such seasonality is
that, to the extent that income distribution through share repurchase
programmes is considered to be a one-off event, companies can afford
to engage in such programmes during recessionary periods without
over-committing themselves through measures such as rises in dividend
payments.
Repurchases by investment companies
The previous section considered the motivations underlying the use

of share repurchase programmes from the perspective of non-investment
companies. This section examines the potential motivations underlying
repurchases by investment companies. These companies, although listed
on the stock exchange and having a fixed number of shares outstanding,
differ significantly from non-investment companies in a number of
their characteristics and as a result some of the motivations identified
in the previous section may be of more or less relevance to investment
companies.
An et al. (2007) note that investment companies, for legal reasons,
do not hold significant amounts of surplus cash and hence repurchase
programmes have to be funded either from the sale of investments or
through long or short-term borrowing, thus reducing the significance
of returning free cash flow.

Second, investment companies in the UK (and their US equivalents

- closed end funds) are required to publish their Net Asset Values (NAV)
(based on the market values of their investments) on a regular basis. This
NAV represents the intrinsic value of the shares and hence, in contrast to
non-investment companies there is, in effect, no information asymmetry
between managers and investors regarding that value (Porter et al.,
1999; An et al., 2007). Share repurchase programmes are not therefore
perceived to signal any undervaluation for investment companies.
Third, in relation to the capital structure hypothesis, investment
companies in the UK have a special tax status that prevents them from
benefiting from tax relief on their interest payments and thus they are
less likely to increase their gearing levels with share repurchases as a basis
with which to enhance corporate value (An et al., 2007). Nevertheless,
given that some investment companies choose to gear themselves, a
change in the gearing levels may be a consideration for management.
Fourth, in order to qualify for approval as investment companies for
tax purposes, investment companies in the UK must meet certain tests.
Amongst these is the requirement that they must not retain more than
15% of their income from investments (ICTA 1988, S842) and must
pay earnings to investors. This renders dividend substitution decisions
as irrelevant to such companies.
Finally, with reference to improving reported financial performance
where share repurchase programmes enhance corporate EPS levels, EPS
levels have less relevance for investment companies which tend to focus
more on NAV levels and discount to NAV as significant indicators of
performance.
Some motivations, however, may be of greater concern to
investment companies than to non-investment companies. First, where
an investment companys shares are trading at a discount to NAV, a
repurchase programme should lead to an increase in share price because,
provided the shares are repurchased at below the NAV, the programme
will enable shareholders to capture the discount (see for example Porter

et al., 1999; Akhigbe et al., 2007; and An et al., 2007). The extent of
the gain will depend on the proportion of shares repurchased and the
level of the discount to NAV. If capital markets are efficient, any gain to
be made should occur when the repurchase programme is announced,
with actual repurchases following the announcement having no impact.
However, it has been suggested that the market may not fully respond
to a repurchase announcement when it is made if, for example, there is
uncertainty about the commitment of the company to actually make
the repurchases (Akhigbe et al., 2007) and thus there may be a longer
term effect.
In addition to, and consequent upon, their impact on share prices,
repurchase programmes will also impact on NAV and the discount to
NAV, factors which, as noted above, are seen as significant indicators of
performance. The announcement of a repurchase programme might be
expected to increase the share price through discount capture, but will not
immediately affect NAV; thus on announcement the discount to NAV
might be expected to show a temporary increase. When repurchases
are actually carried out, however, NAV for the remaining shares will
increase, assuming that the shares are repurchased at below NAV (Porter
et al., 1999; An et al., 2007). At the same time, in the absence of other
effects, the increase in NAV when actual repurchases are completed will
lead to the discount returning to its pre-announcement level. Hence
the overall effect of the repurchase will be a permanent increase in NAV
and a temporary increase in the discount suggesting that increasing
NAV may be a motivation for investment company share repurchases.
Further, investment companies may use share repurchases to reduce
discount to NAV, for example, through an increase in demand; or, in
the event that companies are unable or unwilling to reduce the levels
of discounts, management may set a related but different target, that of
maintaining a steady discount.
The balancing of the supply and demand for shares to influence
market liquidity may also play a relevant role for investment companies.

Indeed this view has grown in perceived importance as institutional

disinvestment in the sector has not been matched by increased retail
demand. Porter et al. (1999), however, note that there are potentially
two countervailing effects on liquidity resulting from share repurchases:
a short-term increase due to increased demand at the time the repurchase
is announced but a longer term decrease due to the reduction in the
number of shares outstanding. In addition, An et al. (2007) noted that
until 2003, any improvement in the liquidity of the shares of investment
companies was likely to be temporary since the liquidity position
could only be improved when repurchase programmes were enacted
(by influencing demand levels) because companies were required to
cancel shares repurchased immediately and were consequently unable to
influence demand and supply levels and in turn liquidity over a longer
time frame. However, since December 2003, listed companies have
been allowed to hold shares in treasury for re-issue subject to stringent
regulation and hence demand and supply management is a possible
motivation for the period covered by this research.
Finally, An et al. (2007) proposed share repurchase programmes by
investment companies may be used to signal a change in the character of
the company a consequence of which is to improve the actual operating
performance (NAV) of the company and in turn its share price. More
specifically, the authors argue that repurchases signal increased director
oversight of the fund manager and, by ensuring that fund size and
management fees become conditional on fund performance, they
improve fund management.
Prior empirical research
A number of studies have sought to explain the corporate use of,

and motivations underlying share repurchase programmes. Reflecting
conventional global repurchasing activity, a large proportion of these
studies have examined the US market, although data from Australia,

Canada and the UK have also been investigated. Prior research has
primarily adopted a capital markets based approach, although surveys
have also played a role in the US and Australia.
Capital markets-based research
The capital markets based studies, relying, principally, on publicly

available information to assess corporate and investor behaviour, have
generally sought to assess the extent to which they enhance shareholder
value and examine specific reasons for these programmes, which may
ultimately be responsible for the change in shareholder value. As is
apparent from Table 2.1, in relation to the value enhancing properties of
share repurchases, academic studies, regardless of the country of origin,
have reported that the programmes result in significant positive market
reactions post-announcement/enactment, although the extent of positive
reaction reported has differed between studies. For example, Rao and
Vermaelen (2002) examine UK repurchase activity and note a smaller
abnormal return for shareholders than that for shareholders in the US.
In contrast, the practitioner based studies by Morgan Stanley have
generated mixed findings. An earlier study reported in 2004 (Cooper,
2004) suggests that companies that announce buy-backs outperform the
market by an average of 13% and up to 21% in the 12 months following
the activity. A later study, covering a longer time frame, reversed these
conclusions and reported an overall inferior performance of the share
price by repurchasers compared to the market average: over the ten year
period analysed, the share prices of the buyback companies rose by an
average of 8.2% per annum, while those of the market and dividend
paying companies rose by 10.3% and 12.7% respectively (Durrant,
2007; Hasell, 2007).

Table 2.1 A summary of prior capital markets-based research
Share repurchase explanations/motivations
Influence Signalling Signalling Capital

Author share price (income) (undervaluation) structure
North American context
Ikenberry et al., 1995 (US data) amongst others
Ikenberry et al., 2000

(Canadian data)
Jaganathan et al., 2000
Guay and Harford, 2000
Fama and French, 2001
Grullon and Michaely, 2002
Bens et al., 2003
Grullon and Michaely, 2004 x
Chan et al., 2004
Guffey and Schneider, 2004
Cooper, 2004 1

Hribar et al., 2006
Durrant, 2007; Hasell, 20071 x
UK context
Rau and Vermaelen, 2002 x
Oswald and Young, 2004
Espenlaub et al., 2006 x
1
Non-academic practitioner-based studies by Morgan Stanley
Blanks the motives that were not examined by the papers cited
/ x refer respectively to studies that show support and fail to show support for the
repurchase motivations examined

Table 2.1 A summary of prior capital markets based research (Cont.)
Share repurchase explanations/motivations

Reducing
Returning free Dividend Influencing tax
Author cash flows substitution EPS levels charges
North American Context
Ikenberry et al., 1995 (US data)

Ikenberry et al., 2000
(Canadian data)
Jaganathan et al., 2000 x
Guay and Harford, 2000 x
Fama and French, 2001 x
Bens et al., 2003
Chan et al., 2004 x
Guffey and Schneider, 2004
Cooper, 2004 1
Hribar et al., 2006
Durrant, 2007; Hasell, 2007 1
UK Context
Rau and Vermaelen, 2002
Oswald and Young, 2004 x
Espenlaub et al., 2006
1
Non-academic practitioner-based studies by Morgan Stanley
Blanks the motives that were not examined by the papers cited
/ x refer respectively to studies that show support and fail to show support for the
repurchase motivations examined

Addressing specific motivations and explanations, the results

recorded in Table 2.1 reflect Chan et al.s (2004) view that taken together
the literature provides a mixed understanding of the economic role of
repurchases (p. 462). The empirical studies report consistent results
in relation to the role of share repurchase programmes to influence
corporate gearing levels (Chan et al., 2004; Guffey and Schneider, 2004)
and reported EPS levels when the EPS level will otherwise fall short of
analyst forecasts (Hribar et al., 2006) or experience a dilutive effect from
new share issues for ESOPs (Bens et al., 2003). Such consensus is absent
for all other motivations and explanations examined, which include the
role of share repurchase programmes to: (i) return excess cash flows and
in turn avoid the problems of overinvestment; (ii) signal managements
confidence in future earnings potential; (iii) signal undervaluation to the
markets; (iv) reduce tax charges in the UK; and (v) replace traditional
dividend payments.
In relation to the free cash flow motivation, Guffey and Schneider
(2004), Grullon and Michaely (2004) and Espenlaub et al. (2006) all
report that repurchasing companies exhibit higher levels of free cash
flow, which are linked to the abnormal returns generated following the
repurchase announcements. Chan et al. (2004), however, reported that
the abnormal returns generated from repurchase programmes were not
associated with free cash flows but were instead linked to decisions to
change the companies gearing levels and signal managerial confidence
in future income levels. Oswald and Youngs (2008) study based in
the UK, which considered the free cash flow view specifically in the
context of managing principal-agent problems, may serve to shed light
on the differences in the results of earlier studies: the authors report that
repurchase programmes appear to be linked to the distribution of free
cash flow only in situations where agency costs associated with surplus
cash are acute and not in companies in general.
With reference to signalling management confidence in future
income, Grullon and Michaely (2004) and Espenlaub et al. (2006),
refute Chan et al.s (2004) results above since the repurchasing companies

in their sample fail to exhibit improvements in future profitability; in

fact they often exhibit a decline in future performance. In relation to
signalling undervaluation, Ikenberry et al. (1995) and Ikenberry et
al. (2000) support the motivation in a US and a Canadian context,
respectively, by reporting that companies strategically trade their shares,
buying a larger proportion of shares when the prices are low and fewer
shares when prices are high. Rau and Vermaelens (2002) results in the
UK context, however, fail to support the motivation, which the authors
attribute to the stringent regulatory conditions which impose timing and
volume restrictions on repurchase activity. Instead, the authors report
that the form and intensity of repurchase activity is influenced by the
tax regulations for pension funds, suggesting that corporate repurchase
activity seeks to generate tax credits on behalf of shareholders. A later
study by Oswald and Young (2004) based on more comprehensive data,
however, reversed the findings of Rau and Vermaelen (2002) in relation to
both the undervaluation and taxation motivations: like US and Canadian
companies, UK companies also strategically trade their shares despite
the regulatory requirements; repurchase activity, the authors note, is not
driven by the desire to generate tax credits for pension funds.
In a separate series of studies, in relation to the role of share
repurchase programmes to substitute dividend payments, Jaganathan
et al. (2000), Guay and Harford (2000) and Fama and French (2001)
all found that companies that paid dividends had more stable and more
permanent income levels while those that used share repurchases had
extraordinary transitory income. Managers, it appeared, were more likely
to use dividend payments when they were confident of the permanency
of an improvement in income. Share repurchases were more likely to be
used when managers lacked confidence that any improvement in income
would persist. Thus the two disbursement methods were employed to fit
with different corporate circumstances. A subsequent study by Grullon
and Michaely (2002), however, arrived at a different conclusion and
reported that repurchases were gradually replacing dividends: companies
funded their share repurchase programmes principally with funds that

would have otherwise been used to make dividend payments. They

further reported that, although companies were unwilling to reduce
their dividends to initiate share repurchase programmes, new payouts
were more likely to be exercised through repurchases than dividends.
Overall, the academic results support the role of share repurchase
programmes in enhancing corporate market value as reflected by positive
market reactions. What is not confirmed, however, with the exception
of influencing gearing levels and EPS levels, are the roles that the
other motivations play in influencing corporate market value through
repurchase activity.
Table 2.1 relates to capital market-based studies of non-investment
companies. This section now turns to studies of investment companies.
In the US context, Porter et al. (1999) and Akhigbe et al. (2007)
examined share repurchases by closed-end funds, broadly equivalent
to UK investment companies. Porter et al. (1999) found that the
discount to NAV narrowed as expected when repurchases were actually
enacted. However, they found no evidence that potential short or long-
term liquidity effects impacted on the excess returns associated with
repurchase announcements and concluded that closed-end funds may
repurchase shares because of the expected wealth gains for shareholders
(p. 274). Akhigbe et al. (2007) found positive abnormal returns
associated with repurchase announcements, supporting the view that
such announcements are perceived as value-enhancing. Cross-sectional
analysis also revealed more favourable valuation effects for funds with
higher discounts to NAV and where a greater proportion of shares were
covered by the announcement. Longer-term share price performance was
tested by comparing buy and hold returns (BHR) for the repurchasing
funds with those of matched non-repurchasing funds over a period of up
to 3 years after the announcement. Repurchasing funds showed higher
BHRs than the control group of funds with more favourable results for
funds with a higher discount to NAV and lower liquidity. Their results
suggest that the long-term effects are influenced by the extent to which
repurchases were actually enacted.

Finally, in the UK, An et al. (2007) examined evidence into the

use of share repurchase programmes in investment trusts, reporting
that shorter term gains were modest in nature and linked closely with
a market-timing arbitrage, while the longer term gains were larger and
apparent for both a share price rise and improved net asset value. The
observable change linked to the improved operating performance, the
authors argued, was a result of governance exercised by directors that
signalled a shift in the distribution of power between directors and
management.
Survey-based research
Mitchell and Robinson (1999) examined the motivations underlying

share repurchase usage in Australian companies, following a period of
legislative changes that made repurchase programmes more allowable.
Analysing publicly cited motivations of 67 repurchase programmes, the
authors reported that repurchase programmes were used principally to
signal undervaluation and influence perceived low EPS. They also noted
that different motivations were associated with different types of share
repurchase programmes. In a later study, surveying managers motivations
underlying the use of share repurchase programmes, Mitchell et al. (2001)
confirmed the results of Mitchell and Robinson (1999): undervaluation
and influencing companies EPS led repurchase activity and different
types of programmes were used depending upon the motivation. In
addition, the authors noted that repurchase programmes were not
viewed as a substitute for dividend payments and that the conservatism
evident in repurchase programmes in Australia was explained by the
associated legal complexities with repurchase programmes, their relatively
high costs, and a perceived negative attitude of investors towards such
programmes.
Wansley et al. (1989) examined US financial managers views on
the use of open market repurchases and tender offer repurchases and on
the factors that influenced tender offer premiums. Survey respondents
supported reasons of undervaluation and the distribution of free cash

flows but disagreed with the substitution hypothesis. Premiums paid

for tender offers also supported the signalling view of repurchases with
premium levels influenced by managers confidence in the future and the
companies share price performance relative to the market. The authors
also noted significant differences in managerial opinions based on the
type of repurchases exercised, namely open market repurchases and
tender offer repurchases. For example, while tender offer repurchasers
believed that there were limited investment opportunities, open market
repurchasers disagreed. The authors attributed the differences in results
to the higher volume of shares sought and repurchased through tender
offers than open market repurchases.
Baker et al. (2003) inquired into the use of repurchase programmes
in US companies in the late 1990s. The authors reported that 90% of
the respondent companies used open market repurchases, while the
remainder used Dutch tender repurchases, target block repurchases
and other forms of repurchases. Moreover, 71% of the companies
financed their repurchases with available cash, 26% with short-term
and long-term debt and 3% through other means. Results indicated
that while undervaluation continued to receive strong support among
the survey participants, capital structure had become a more important
determinant of repurchases and the provision of shares for incentive
schemes less important.
The Brav et al. (2005) study is the latest study to examine the role
of share repurchase programmes in the US, as part of a broader study
that also examined companies dividend policies. Results of the survey
indicated that pay-out policies were considered only after the investment
decisions and liquidity needs of the companies had been satisfied, unless
this approach entailed a dividend cut, which managers were reluctant to
pursue. Results indicated that, rather than increasing dividends, there
was a trend amongst the sample respondents to repurchase shares as a
way in which to return capital to investors. The way in which, and the
purpose for which, dividend payments and repurchase programmes were

used, however, differed. Specifically, repurchases were believed to be a

more flexible form of payment, paid out of temporary income rises or
when good investments were hard to find, while dividend payments were
considered to be less flexible and therefore paid from permanent rises
in income. Moreover, while dividend payments modestly supported
the signalling, free cash flow and clientele hypotheses, repurchase
programmes were used to signal undervaluation and managers were also
very conscious of the effect of repurchase programmes on their EPS.
Summary
Prior theoretical research has developed an extensive list of

motivations underpinning the use of share repurchases by investment
and non-investment companies. Capital markets based research that has
inquired into the motivations underlying share repurchase programmes
has collectively produced inconclusive results as the findings of different
studies have often been inconsistent. Survey based results in the US
and Australia have tended to support the views that share repurchases
are used when companies are undervalued and when they need to
improve their financial performance (namely reported EPS levels). More
recent survey evidence suggests that share repurchase programmes also
are used to influence corporate gearing levels, although taxation and
divided substitution appear to have little support. There has been a
notable absence of similar studies in the UK. Research into investment
companies in the UK (closed end trusts in the US) is also in its infancy
and there has been a distinct absence of studies in the UK and elsewhere
that have canvassed the views of corporate shareholders to ascertain
their views about share repurchase programmes in influencing corporate
market value.
The next chapter describes the methods employed to conduct the
study and the characteristics of the respondent samples.

3 Research Methods
Introduction
This chapter describes the methods adopted to undertake the study and
summarises the characteristics of the respondent samples.
Research approach
The key method of inquiry for this study was a questionnaire survey.
In an attempt to further understand investor perceptions of repurchase
activity, an area that is currently under-researched, it was intended to
supplement this with interviews with a small number of institutional
investors. The purpose of these interviews, taking place after analysis
of the results of the survey, was to attempt to illuminate further the
findings of the survey. However, institutional investors proved reluctant
to be interviewed, in part no doubt due to the unfortunate timing of the
study during the current period of market turbulence. As a result it was
possible to conduct only three interviews; these were with individuals
occupying senior roles within the pension fund sector and the investment
fund sector. Nevertheless the interviews provide some useful insights
into investor perceptions of the repurchase process and comments from
the interviewees are included in the analysis in the succeeding chapters.
The survey approach
Although the survey approach differs from much of the prior capital
markets based research, it has become popular in finance research in
recent years. Indeed finance researchers are beginning to argue that

it is important to augment the dominant markets based research with

different empirical approaches to triangulate and validate the results
of those quantitative studies (Tufano, 2001; and Graham and Harvey,
2001). The survey methodology complements the capital markets based
approach by using a more direct way with which to understand how
companies operate.
Two distinct questionnaires addressing issues about share repurchases
were developed: one for the corporate community and one for the
investor community. In each case, the questionnaires were modified
to accommodate, respectively, the repurchasing and non-repurchasing
groups amongst companies, and the institutional and private investors.
In addition, the questionnaires for companies were tailored for normal
(i.e. non-investment) companies and for investment companies to reflect
the different characteristics of the two types of organisations and in turn,
the different motives underlying their use of repurchase programmes
(Figure 3.1). In total six different versions of the questionnaire were
prepared and dispatched to the target audiences: repurchasing non-
investment companies; non-repurchasing non-investment companies;
repurchasing investment companies; non-repurchasing investment
companies; institutional investors; and finally, private investors.
Figure 3.1 A summary of the study participants
Target audience
Corporate community Investor community
Investment companies Non-investment companies Private Institutional
Repurchasers Non-repurchasers Repurchasers

Research methods 37
Sample selection
Repurchasers, for both non-investment companies and investment

companies, were identified as those that had undertaken share repurchases
between 2003 and 2007 inclusive. They were identified using the LSE
website, on which all announcements of all repurchase programmes
are recorded. In total 338 non-investment companies were identified
as having used repurchases during this period. Of the 338 companies,
four were deleted from the sample as they had head-offices in countries
other than mainland UK and questionnaires to another nine were
undeliverable for a variety of reasons including unavailable/incorrect
addresses and mergers/delistings. Therefore, in total 325 questionnaires
were delivered to the repurchaser companies.
To determine the sample of non-repurchasers for the non-
investment companies, a matched sample based on the stock exchange
sector in which the repurchaser companies operated and their size,
in that order, was created. Anticipating a lower response rate with
non-repurchasers, following the one to one match, an additional 66
companies were added to the list, to capture similar sectors and size as
the repurchaser companies, to the extent possible. A total sample of
400 non-repurchasers was created although, of these, questionnaires to
ten companies were undelivered for reasons aforementioned, leaving a
delivered final sample of 390.
For the investment companies, from a total of 495 companies, 245
(49.5%) undertook repurchases during the period; the remaining 250
did not. All were considered for the study. From this initial list, two
repurchasing investment companies and 13 non-repurchasing investment
companies were omitted for reasons including the fact that the addresses
were unavailable or non-deliverable and/or the company headquarters
were not based in the UK. The final sample therefore comprised
243 repurchasing investment companies and 237 non-repurchasing
investment companies.

Samples for the investor communities, namely the institutional

investors and private shareholders, were generated from a number of
different databases. The private shareholder list, made up of a sample of
400 shareholders, was randomly generated from the bulk shareholder list
for one of the FTSE 100 companies, obtained from Companies House.
A decision to target 400 private shareholders without a reminder (in
place of 200 shareholders with a reminder) was made in anticipation of
a relatively low response level to an original mail shot and a reminder.
Five questionnaires were returned on the basis that the recipients no
longer held shares in listed companies. The final private shareholder
sample was therefore 395.
The institutional investor sample of 200 comprised four types of
investors in order to capture diversity within the sample. The groups
included investment trust companies (who as noted above are also
frequent users of share repurchase programmes), unit trusts and open
ended investment companies (OEICs), assurance companies and
pension funds. The sample for investment trust companies was drawn
at random from the investment company lists (for repurchasers and non-
repurchasers) detailed above. That for unit trusts and OEICs was drawn
from the financial express website that provides, inter alia, contact details
for these organisations. The assurance company sample was determined
from the FAME database, using a Standard Industry Classification (SIC)
code for insurance companies and subsequently verifying the sample by
ensuring that individual companies had substantial investments and were
engaged in the assurance business. Finally, the pension fund sample was
purchased from A. P. Information Services Ltd., a company that holds
details of all UK pension funds; the pension fund sample comprised the
top 50 funds by capital value. Four questionnaires were not deliverable
to the respective organisations, and the final institutional investor sample
was therefore 196.

Research methods 39
The questionnaire
A primary questionnaire, subsequently amended to suit the different

audiences, was pilot-tested by practitioners and academics to ensure
clarity, validity and appropriateness of the questions and questionnaire
design, and adjustments were made to the final versions.
For the non-investment companies (both repurchasers and non-
repurchasers) questionnaires were sent to finance directors (or company
secretaries or chief executives in that order). To enhance the response
rate, all questionnaires were, where possible, sent to a named individual.
In the absence of a finance director and company secretarial
positions for the investment companies, questionnaires were addressed
to the chairperson. Moreover, it proved difficult to access the names
of these individuals as such details were not readily available on the
parent company websites and thus letters were simply addressed to The
Chairperson. However, it became apparent that often trusts managed by
the same management company had the same chairperson. To encourage
participation, while avoiding repetition of responses to the generalist
sections, respondents were advised in the cover letter to complete one
questionnaire in full, and to fill in section B2 that related to the specific
user of repurchase programmes for the respective trust in the remainder.
Finally, questionnaires to private shareholders were addressed
specifically to the share owners, while those to the institutional investors
were addressed to named individuals where such information was
available (for the pension funds and unit trusts) and to The Primary
Fund Manager in the absence of such information.
A postal approach was used to administer the questionnaires and
respondents were sent a self-addressed freepost envelope. With the
exception of the private shareholder group, respondents who failed to
respond to the first request of participation were also sent a reminder
to encourage participation.

Questionnaires for the corporate sector comprised five separate

sections: a section on background information; two sections on corporate
motivations; a section on the implications of the regulatory environment;
and a section which invited additional comments from participants.
The background section covered the practical aspects of share
repurchase programmes such as the manner in which programmes are
financed, how shareholder approval is sought and how the repurchased
shares are handled post-repurchase. The first of the two sections on
corporate motivations sought to capture views as to why companies in
general use share repurchase programmes; both repurchasing companies
and non-repurchasing companies were asked for their views. The second
section, which differed between repurchasing and non-repurchasing
companies, was more specific in nature. For repurchasing companies
it sought to capture the precise motives that had led them to use share
repurchase programmes. For non-repurchasing companies, where the
focus was on the likelihood of future use of repurchase programmes,
this second section captured: (i) the likely factors which would drive
repurchase activity in the event that the likelihood of future usage was
high; and (ii) the reasons for non-use in the event that the likelihood of
future usage was low. The fourth section, inquiring into the implications
of the regulatory environment, captured the implications of the current
context of repurchase activity and also the need for future changes in
regulation. Finally, the fifth section enabled respondents to make any
additional comments in relation to the area of study or the survey being
undertaken.
All questions in the survey with the exception of the final section that
allowed respondents to write freely were close-ended with respondents
being given a choice of answers from which to choose. Close-ended
questions, it was believed, would increase participation. For the sections
that sought managerial opinions on corporate motivations and regulatory
regimes, a series of statements pertaining to these topics were posed, and

Research methods 41
using a 5 point Likert scale respondents were requested to agree/disagree

with the statements.
The investor questionnaire for both private and institutional
investors comprised four sections: a background section covering
basic information about the investors investment strategies and three
additional sections that broadly mirrored sections two, four and five of
the corporate questionnaire to enable comparison of results between
managers and investors.
Questionnaire responses
Table 3.1 below summarises the response levels across the different
sets of questionnaire dispatched.
Table 3.1 A summary of the response levels across the three different
questionnaire audiences
User Non-user
Non-investment companies companies companies
Questionnaires dispatched 325 390
Response level 85 (26%) 44 (11%)
Useable questionnaires 66 (20%) 31 (8%)
User Non-user
Investment companies companies companies
Investors Institutional Private

As is apparent from Table 3.1, response levels from repurchasing

companies were significantly higher than from non-repurchasing
companies and response levels were also higher from the non-investment
companies (for both repurchasers and non-repurchasers) compared to the
investment companies. With both the investment companies and non-
investment companies, however, not all respondents agreed to participate
in the study; a small proportion responded to convey their decisions not
to participate. The two most common reasons for non-participation
were intense work commitments that precluded participation and
company policy that disallowed managerial participation in external
surveys, although on occasion no specific reasons were provided. A small
number of private shareholders also wrote in to decline the opportunity
to participate, and of these, some cited their lack of knowledge in the
area as their reason for non-participation. There is therefore a potential
for bias in these results as further detailed in chapter six.
Overall, the response rates for repurchasing and non-repurchasing
non-investment companies were 26% and 11% respectively, and
15% and 9% for the investment companies. The response levels for
both groups of repurchasers are comparable to prior research, and in
anticipation of a poorer response for non-users, a larger sample size was
employed, where possible. To test for bias, the descriptive characteristics
of the early respondents and late respondents, that is participants who
responded to the first survey request and the second request, respectively,
were analysed using statistical tests. No statistically significant differences
were found for the non-investment company sample or the investment
company sample. Overall, the results reported in this report should be
representative of the views of managers of quoted companies. In relation
to the investor survey, the response level for private shareholders was
surprisingly high (12%) especially when compared to that of institutional
investors, of whom only 22 (11%) returned usable questionnaires.

Research methods 43
Summary
This chapter describes the survey and interview approaches

employed to undertake the research, summarises the response levels
amongst the different sub-groups and tests for respondent bias.
The next three chapters report the survey and interview results from
the financial managers of investment and non-investment companies as
well as private and institutional investors.

4 Financial Managers of Non-Investment
Companies
Introduction
This chapter presents the results of the questionnaire survey in relation

to the views of financial managers from non-investment companies.
The chapter commences with a description of the characteristics of the
respondent companies and then considers the views of the respondents
in relation to: (i) the general motivations underlying the use of share
repurchase programmes by UK companies from both repurchasing and
non-repurchasing companies; (ii) the specific motivations that have been
responsible for the use of share repurchases by repurchasing companies
and that may be responsible for those likely to initiate share repurchases
in a sample of hitherto non-repurchasing companies; and (iii) regulation
surrounding share repurchase activity in the UK.
Respondent characteristics
Of the 97 respondents, as reported in chapter three, 66 repurchased

shares (repurchasers) in the period 2003 - 2007 (inclusive) and 31 did
not (non-repurchasers). Table 4.1 summarises the basic financial and
market characteristics of the two groups. Panel A of Table 4.1 presents
three size measures: turnover, total assets and market capitalisation.
The table reveals that, on average, repurchasing company respondents
were larger than non-repurchasers across all three measures. This size
difference is perhaps explained in terms of larger companies having
access to more resources and therefore being better equipped to engage
in repurchase programmes.

Panels B and C of Table 4.1 present the market characteristics and

sector composition respectively of the repurchaser and non-repurchaser
groups. As can be seen from the table, the majority of respondents in
both cases were listed on the main market with 70% of repurchasers and
74% of non-repurchasers listed on that market. In addition, respondents
came from 28 market sectors, six of which, media, real estate, support
services, general retailers, software and computer services and travel and
leisure each provided more than 5% of respondents, together accounting
for over half the respondents.
Table 4.1 A summary of the respondents financial and market

characteristics
Panel A Financial characteristics

All companies Repurchasers Non-repurchasers
Mean Max Min Mean Max Min Mean Max Min
m m m m m m m m m
Turnover 5,415 178,525 0 7,302 178,525 5 1,314 16,221 0
Total assets 14,342 666,947 5 19,728 666,947 5 2,085 11,384 8
Market
capitalisation 5,765 134,376 5 7,843 134,376 5 1,341 7,069 8
Panel B Market characteristics

No % No % No %
Main market 69 71.1 46 69.7 23 74.2
AIM 28 28.9 20 30.3 8 25.8

financial managers of non-investment companies 47
Table 4.1 A summary of the respondents financial and market

characteristics (Cont)
Panel C Industrial sector

Sector No % No % No %
Automobiles & parts 1 1.0 0 0.0 1 3.2
Banks 2 2.1 2 3.0 0 0.0
Construction & materials 2 2.1 2 3.0 0 0.0
Electricity 3 3.1 1 1.5 2 6.5
Electronic & electrical equipment 3 3.1 3 4.5 0 0.0
Food & drug retailers 2 2.1 2 3.0 0 0.0
Food producers 3 3.1 2 3.0 1 3.2
Forestry & paper 1 1.0 1 1.5 0 0.0
Gas, water & multiutilities 3 3.1 1 1.5 2 6.5
General financial 4 4.1 4 6.1 0 0.0
General industrials 1 1.0 1 1.5 0 0.0
General retailers 8 8.2 5 7.6 3 9.7
Health care equipment & services 1 1.0 1 1.5 0 0.0
Household goods 4 4.1 2 3.0 2 6.5
Industrial engineering 3 3.1 3 4.5 0 0.0
Life insurance 1 1.0 1 1.5 0 0.0
Media 10 10.3 6 9.1 4 12.9
Mining 3 3.1 2 3.0 1 3.2
Nonlife insurance 2 2.1 1 1.5 1 3.2
Oil & gas producers 3 3.1 2 3.0 1 3.2
Personal goods 1 1.0 1 1.5 0 0.0
Pharmaceuticals & biotechnology 1 1.0 1 1.5 0 0.0
Real estate 10 10.3 6 9.1 4 12.9
Software & computer services 8 8.2 6 9.1 2 6.5
Support services 8 8.2 4 6.1 4 12.9
Technology hardware & equipment 2 2.0 2 3.0 0 0.0
Tobacco 1 1.0 1 1.0 0 0.0
Travel & leisure 6 6.2 3 4.5 3 9.7

Table 4.2 summarises the basic repurchase characteristics of

repurchasers (Panel A) and non-repurchasers (Panel B), and also presents
the views of the respondents (both repurchasers and non-repurchasers)
in relation to the broad functioning of capital markets that may have
influenced repurchase use (Panel C).
Table 4.2 Respondents: A summary of basic characteristics
Panel A Share repurchase users (n=66)

Methods of share repurchases %
Open market repurchases 94
Dutch tender offers -
Tender offers 6
Private arrangement 3
Method of financing share repurchases %
Existing cash balances 81
Long-term debt 21
Short-term debt 25
Management of shares repurchased %
Cancelled immediately 57
Held in treasury for resale 18
Held in treasury for re-issue 46
Operations surrounding repurchase programmes %

Existence of a formalised repurchase policy 34
Routine approval for programmes from shareholders 91
Use of external advisors 56
Panel B Share repurchase non-users (n=31)

Characteristics %
Prior use of share repurchases 10
Approval of share repurchases prior to 2003 48
Approval of share repurchases between 2003 and 2007 68

Table 4.2 Respondents: A summary of basic characteristics (Cont)
Panel C Users and non-users: market views (n=97)

Dividend payments versus share repurchases %
Percentage of respondents who rank share repurchases ahead of dividend payments 54
as a method of surplus cash utilisation
Market efficiency
The extent to which capital markets are considered to be efficient, that is all Mean
historical and publicly available information is accurately reflected in the 3.27
companys share price (five point scale from always (5) to never (1))
Importance of the EPS
The level of importance you consider investors place on reported earnings per share Mean
(3 point scale from great importance (3) to no importance (1)) 2.51
Examining the operations of repurchase programmes, an analysis

of the table reveals that open market repurchases were the most
popular form of this activity; this method was used by over 90% of
the participating companies. Tender offer repurchases and private
arrangement repurchases were used only occasionally (6% and 3%,
respectively) and none of the companies used Dutch tender offers, the
more sophisticated version of fixed tender offers. The most popular
method with which to finance the repurchase programmes was existing
cash balances (81%) although, on occasion, companies also relied on
short-term debt (25%) and even long-term debt (21%); these results
closely mirror the findings on US companies recorded by Baker et al.
(2003) in which 71% of the companies used existing cash balances and
26% employed debt to fund the repurchase of their shares. Following
the re-acquisitions, while close to 60% of the companies cancelled the
shares immediately, 64% held the shares in treasury either for reissue
(46%) or for resale (18%) (some respondents cancelled some repurchased
shares during the period but held others in treasury). Since the regulation
surrounding the opportunity to hold shares was amended at the end
of 2003, just over 60% of the sample had exercised this opportunity.

Despite the increasing popularity of share repurchase programmes,

only one third of the companies surveyed had formalised repurchase
policies. Most companies, however, sought approval from shareholders
for their use as a matter of routine rather than to enable a specific
repurchase programme, and slightly over half the companies employed
external advisors to guide the repurchase programmes. In most cases, the
latter position was occupied by company brokers and financial advisors
to advise on market perceptions, although companies occasionally sought
advice from legal experts to ensure compliance with the regulations of
the stock exchange and the requirements of the Companies Act.
In relation to the non-repurchasing companies who participated in
the survey, only three companies (10%) had repurchased shares prior
to 2003. A much higher proportion, however, had sought approval to
engage in repurchase programmes without actually subsequently enacting
them, and there appeared to be a gradual rise in this practice over
time: prior to 2003, 48% had sought approval to engage in repurchase
programmes but by 2007 this had risen to 68%.
Finally, responses in relation to the broad functioning of the capital
markets from both repurchasers and non-repurchasers were analysed.
These indicated that: (i) a majority (54%) expressed a preference for
share repurchase programmes over dividend payments in general terms;
(ii) most believed the market to be efficient since the responses to this
statement, on average, lay between the sometimes (3) and almost all of
the time (4) options (yielding a mean score on a five point scale of 3.27);
and (iii) investors were believed to place a significant level of importance
on the earnings per share (EPS) ratio (a mean score of 2.51 out of 3).
Motivations for share repurchase programmes
This section discusses the results of the questionnaire sub-section

that inquired into respondents views about the motivations underlying
the use of share repurchase programmes in general terms. Using a Likert

scale where five indicated strongly agree and one strongly disagree,
respondents were requested to state their views on a series of statements
that looked at the different motivations underlying share repurchases.
Table A, Appendix One, presents the results for each statement, including
the percentages for agreement/disagreement levels (the strongly agree
and agree, and strongly disagree and disagree have been combined,
respectively) and the mean scores of the responses. The mean scores
for each statement provide an indication of the aggregate or average
response to the statements with means in excess of three indicating
broad agreement (with higher scores indicating stronger agreement)
whilst those below three indicate broad disagreement (with lower scores
indicating stronger disagreement). These means were tested to see if
they were statistically different from three (indicating no opinion) and
the results of this analysis are reported in the discussion which follows.
The statistical significance of differences between the views of managers
of repurchasers and non-repurchasers were also analysed and are reported
below.
Share repurchase programmes and share prices
In the belief that share repurchase programmes ultimately serve to

improve shareholder value, respondents were asked about the relationship
between the use of share repurchase programmes and share price rises.
Interestingly, however, fewer than 40% of the respondents believed
that share repurchase programmes themselves led to share price rises,
generating a statistically insignificant mean of 3.13. There was, however,
broad agreement that any price response to share repurchases was gradual,
with 51% of respondents agreeing with this view (mean 3.23), rather
than immediate where only 18% agreed (mean 2.57). Moreover, the
proportion of respondents who believed that repurchase programmes
increased share prices was very similar to the proportion that believed
that announcements of intentions to repurchase shares increased share

prices (mean 3.18). Overall the results indicate that there is a divide
between managers who believe that share repurchase programmes directly
influence company value and those who believe that repurchases do not
drive company value.
Within the constraints of a limited relationship between share
repurchase programmes and share prices, the results reported in this
section lend support to the longer term potential and role of share
repurchase programmes and also highlight the role of announcements
of repurchases vis a vis actual enactments. These results are perhaps
unsurprising, particularly in the UK where open market repurchases
dominate and there are tight restrictions on the volume of repurchases,
which can thus play only a limited role at any one time.
Both repurchasers and non-repurchasers shared similar views in
relation to the ability of actual share repurchases and announcements
of intentions to repurchase shares to influence company value, but they
differed on the longer term effects. Repurchasing companies on average
tended to support the notion of a gradual, longer-term impact of share
repurchases (63% agreeing and a mean score of 3.41) as compared to
non-repurchasers who tended to disagree with this view (only 24%
agreeing and a mean score of 2.83). The difference in these results
perhaps helps to explain the diversity in company decisions to use or
not use repurchase programmes.
Repurchases versus dividends
Respondents did not think that repurchase programmes were a

substitute for dividend payments or increases in dividends (disagreement
levels of 91% and 79% respectively) but 67% agreed that they were a
substitute for special dividends. One possible reason for this, as noted
in statement four, was that they were considered to be a flexible means
with which to return wealth to shareholders (85% agreement), rather

than the more rigid, fixed approach resulting with regular dividends
(Dhanani, 2005).
Nevertheless, when asked to rank their preferences between dividend
payments and share repurchase programmes in Table 4.2 over half of
companies (54%) reported a preference for share repurchase programmes
over dividend payments. The apparently inconsistent results may be
explained in terms of the differing characteristics of share repurchases and
dividend payments which: (i) do not make them interchangeable; and
(ii) call for the use of share repurchase programmes over regular dividend
payments. One such characteristic is the flexibility associated with share
repurchase programmes over dividends: companies may be inclined to
use share repurchase programmes in preference to dividend payments
in the light of their flexibility in terms of the level of repayments, which
is broadly absent with dividend payments. At the same time, share
repurchases are unlikely to replace dividends as they each appear to fulfil
different roles in corporate organisations.
Repurchasers were more inclined than non-repurchasers to agree
that repurchase programmes offer a flexible means with which to return
surplus cash to shareholders (statement 3) and that share repurchases
are a suitable substitute for special dividends (statement 4). Nearly
three quarters of repurchasers agreed with statement 3 compared to
only half of non-repurchasers and over 90% of repurchasers agreed with
statement 4 compared to 73% of non-repurchasers. Once again, these
results may serve to explain why non-repurchasing companies do not
use share repurchase programmes; they, or some of them, appear to have
reservations about the flexibility of such programmes and rely more on
alternative means such as special dividends with which to return surplus
cash to shareholders.

Signalling undervaluation/future performance
Chapter two identified two potential attributes about which

managers could use share repurchase programmes to send signals
to the external markets and reduce information asymmetry: (i) to
signal managements confidence in future earnings/share prices; and
(ii) to signal the intrinsic undervaluation of a companys shares. Just
over 60% of the respondent sample believed that share repurchases
provided a valuable and useful signal of managements confidence in
future earnings/share prices (statement 6) and a somewhat smaller
proportion, approximately half the sample, affirmed their role as a
signal of undervaluation (statement 5). The relatively smaller role of
the undervaluation motivation is perhaps not surprising in the UK
environment in which the timings of repurchase activity are restricted
and thus opportunities to signal undervaluation reduced. In relation
to statement 6 the context in which the signalling role was expected to
materialise was not clear. Specifically, fewer than 20% of the respondents
agreed with statements 7 and 8, which examined whether the repurchase
programmes served to signal a permanent change in future income or
a temporary one. Overall, the results for statements 6, 7, and 8 are
unclear and call for further investigation. Finally, 42% of the respondents
believed that announcements of share repurchases, with or instead of
re-acquisitions themselves, were a source of publicity for the markets,
although there was somewhat greater enthusiasm for this view amongst
non-repurchasers (54% agreeing) than repurchasers (38% agreeing).
Interestingly, the mixed views presented in relation to signalling were
not explained by any statistically significant differences between the
views of managers of repurchasers and non-repurchasers.
In relation to capital structure and investment decisions, there

was a general consensus that companies made their share repurchase

decisions after they had taken their capital structure and investment
decisions, although the slightly lower agreement level for the former
may be explained in terms of the repurchase decisions themselves
influencing capital structure outcomes. Specifically, just over half the
sample respondents believed that share repurchase programmes are used
to optimise companies gearing ratios.
The use of share repurchase programmes to return surplus cash

to shareholders and thus prevent its misuse internally, generated a
statistically insignificant mean. These results reflect a diversity of opinion
amongst company managers: 40% of respondents supported this view,
29% disagreed and 32% were neutral. Overall, while the results in
aggregate do not support the agency explanation, a sub-group of the
respondents is supportive of this reason for share repurchases.
As already noted above, respondent companies believed that share

repurchases were a flexible mechanism with which to return excess capital
to investors. One reason for this is to allow investors the opportunity to
reinvest their funds in activities that generate a return higher than that
which the companies can achieve themselves, a view which attracted
overwhelming support with 95% agreement. In other words, the survey
results support the argument that share repurchase programmes facilitate
the reallocation of capital; management exhibit behaviour to enable
investors to maximise their wealth without necessarily doing so by seeking
to improve the companys own share price (as reported above). At the
same time, the response to statement 18 (67% agreement) indicated that
company shares would be repurchased if they offered the best investment
opportunity at the time when making investment decisions. In other

words, within the framework of allocating capital efficiently, two-thirds

of the managers considered investing in their own shares.
Stakeholder expectations
Managerial responses in relation to capital reallocation suggest

that shareholder considerations are an important input into repurchase
decisions and this, it could be argued, is inevitable since management
have to seek shareholder approval prior to engaging in repurchase activity.
The routine way in which this approval is sought, however, (as seen in
Table 4.2) potentially weakens the role that the approval process plays in
share repurchase programmes. However, management generally believe
that shareholder views are an important consideration when reaching
share repurchase decisions (83% agreement). There was also strong
support for the view that both institutional (82%) and private (81%)
shareholders benefited from share repurchase programmes, while brokers
and advisors were on average also seen to benefit. How the benefits for
investors accrue, that is whether the sellers or the non-sellers benefit from
repurchases, is less clear, and this may in part reflect the high prominence
of open market repurchases where sellers may not necessarily be aware
that they are part of a share repurchase and equally non-sellers may not
be aware that this opportunity to sell shares has arisen.
The involvement of brokers/advisors in initiating and/or encouraging
share repurchase programmes and subsequently benefiting from them, as
seen above, needs to be considered within a principal-agency framework,
in which the experts may be tempted to further their own interests at
the expense of shareholders. Managers, who may not benefit from the
programmes themselves, need to carefully consider the advice to ensure
that shareholder interests are ultimately protected.
Perhaps surprisingly, the non-repurchaser group took a stronger
view on the importance of shareholder considerations (100% agreement)
compared to the repurchaser group (74% agreement). These results

potentially suggest that shareholder views/requirements inhibit the use

of repurchase programmes amongst the non-repurchaser companies.
This view is explored in more detail later in this chapter.
The suggestion that share repurchase programmes enable companies

to improve their EPS levels by reducing the number of shares across which
the earnings are distributed was generally supported by the respondents:
76% of the respondents agreed that repurchase programmes are used
in this capacity. Moreover, as reported in Table 4.2, most managers
also believe that reported EPS levels are of significant importance to
investors and hence the results in aggregate indicate that share repurchase
programmes are used to influence reported EPS levels.
Reissue considerations
The use of share repurchase programmes to create shares for reissue

to schemes such as ESOPs and bonuses generated a mixed response:
while 40% of the respondents believed that share repurchases are used
for this reason, 32% disagreed and 29% voiced no opinion. The overall
mean of 3.05 was not statistically significant. The diversity of response
may in part be a result of the recent change in legislation in 2003
which allows companies to hold shares in treasury rather than cancel
them immediately following a repurchase. As noted in Table 4.2, 36%
of the repurchaser companies had not actually taken advantage of this
opportunity. In addition, this, in part, relies on companies engaging in
activities such as ESOPs and scrip dividends that introduce the need to
hold and own shares for reissue.
A relatively small proportion of respondents agreed with the view

that share repurchase programmes are used to ward off potential take-

overs (Vermaelen, 2006); in fact, 52% actively disagreed with this

statement. These results are perhaps unsurprising in the light of the
overwhelming use of open market share repurchases reported in Table
4.2; tender offer programmes are more appropriate for this purpose
(Bagwell, 1991). Indeed the comparative unpopularity of tender offers
compared to open market repurchases may well be a reflection of the
fact that companies do not look at share repurchase programmes as a
defence tactic for a take-over.
Other reasons for repurchases
The growth in share repurchases is not generally seen as a response

to a fashionable trend or to influence the market liquidity of shares.
The latter result in the UK is perhaps unsurprising given the relatively
low volume of shares that may be purchased together with the timing
restrictions, which collectively render them unlikely to be able to
significantly influence share demand and, in turn, liquidity. However,
as chapter five explores, this motive may be a consideration for particular
types of company, in particular investment companies, whose shares are
less frequently traded.
Responses in relation to the impact of market conditions on the
appropriateness of repurchasing shares generated a response of no
opinion from just over half of the respondents, although of the remainder
who did express a view, twice as many respondents disagreed that share
repurchases were more appropriate in falling markets. The variation in
results observed together with the overall disagreement level (mean 2.70)
may, in part, be explained by the fact that differing circumstances may
make share repurchases attractive in both falling and rising markets.
For example, during rising markets, investors may be willing to tolerate
higher gearing levels, which may make repurchase programmes popular
during such conditions. Conversely, during falling markets, managers
may be more inclined to return cash to investors to enable them to invest
it more efficiently and in this case, the programmes will be popular in

falling markets. Finally the role of share repurchases as a vehicle with

which to influence the total level of dividends paid out or the overall DPS
levels generated mixed views with 40% agreeing with the statement and
38% disagreeing with it, and a statistically insignificant mean level of 3.01.
Motivations underlying actual share repurchases
While the above section considered respondents views in relation

to the use of share repurchase programmes in general terms, this section
reports on results in relation to the motivations underlying actual
repurchases by repurchasers and the likely motivations underlying possible
repurchases in a sample of non-repurchasers who indicated a possible use of
this approach in the short to medium-term future. Table 4.3 summarises
the results. Comparisons between the results of repurchasing companies
and non-repurchasing companies should be considered with caution as
only nine non-repurchasing companies were in a position to complete this
section of the questionnaire.
Most repurchasing companies identified multiple reasons for engaging
in share repurchases and while the mode for the number of motivations was
four, two companies identified more than eight reasons underlying their
repurchase use. Amongst these companies, the opportunity to return excess
cash to shareholders was by far the most frequent motivation, present in
73% of the 66 companies. This result perhaps serves to explain the change
in the trend of share repurchase programmes in the current turbulent
market plagued by a fall in profits and a lack of credit. First, companies may
not have excess cash to return to investors, and second, even if they do have
some spare capacity, they are likely to hold it as a valuable reserve in absence
of the availability of external funds. Other reasons that follow include
the need to improve the reported EPS level (49%); signal undervaluation
of company shares (39%); and optimise the companies gearing ratios
(36%). Further, just under one third of respondents (29%) cited that they
used repurchase programmes in response to investor expectations; 27%
as a flexible means of cash distribution to influence capital structure and

investment decisions; and 26% to influence company share price. All

other motivations including the provision of shares for reissue and as a
signal of an improvement in future performance were less prominent,
present in under 25% of the cases canvassed.
Table 4.3 Motivations underlying actual share repurchases
Repurchasers Non-repurchasers
(n = 66) (n = 9)
Motivational factors % %
To return excess cash to investors 73 78
To improve the firms reported EPS 49 44
To signal undervaluation of the companys shares 39 44
to investors
To increase the firms gearing ratio 36 22
To respond to investor expectations 29 56
To facilitate capital structure and reinvestment 27 22
decisions by introducing a flexible cash
distribution mechanism
To increase share price 26 11
To invest in the best available investment 20 22
opportunity at the time
To signal an expected improvement in future 18 -
performance to investors
To provide shares for reissue 18 11
To respond to falling markets 9 -
To manage the perception that funds may 6 11
otherwise be misused internally
To improve the liquidity of the shares in the 6 -
market
To protect against a potential takeover 6 11
To replace dividend payments 3 11
To respond to market trends 2 -
Notes: This table captures the views of the repurchaser group and the nine companies
from the non-repurchaser group who indicated that they were likely to use share
repurchase programmes in the short to medium term future.

While some of the results reported in this section are consistent

with the generalist views from both repurchaser and non-repurchaser
groups reported in Table A, Appendix 1, others are somewhat surprising.
Specifically, actual practices compared closely with generalist views in
relation to: (i) capital reallocation; (ii) improving reported financial
performance; (iii) shareholder considerations; and finally (iv) capital
structure decisions. These motivations explain the limited support for the
role of share repurchase programmes in increasing share price. Instead the
overriding objective appears to be simply to return the wealth generated
to shareholders, or prevent a decline in share value that may arise from
failing to meet shareholder expectations. Alternatively, share repurchase
programmes are not seen to have a direct association with share prices,
but influence them through changes in such things as gearing levels.
Differences arose in relation to signalling undervaluation/future
performance. Although respondents generally indicated greater
support for signalling future performance than for signalling current
undervaluation, in practice undervaluation played a more dominant
role. In addition, although respondents in general supported the view
that shares were repurchased when they represented the best possible
investment, this was not one of the top five reasons behind actual
repurchases.
Factors that were likely to influence a group of non-repurchasers
to use share repurchase programmes followed broadly the same pattern
as that for the user group with the opportunity to return excess cash to
shareholders topping all motivations, followed by influencing EPS levels
and signalling undervaluation to the market. Shareholder considerations
also appeared to play an important role, essentially mirroring the non-
repurchasers responses in Table A, Appendix One, where they expressed
a stronger view in support of the relevance of shareholder considerations
than their repurchaser counterparts. The two groups differed in relation
to the role of repurchase programmes to optimise gearing levels with
36% of repurchasers citing this as motivating their repurchase of shares
whilst only 22% of non-repurchasers indicated that it might motivate
them to repurchase shares in the future.

Reasons for decisions not to participate in share

It is apparent from Table 4.4, which records the reasons for the
non-use of share repurchase programmes, that no one reason dominated
respondent views. There was, however, a general consensus that a simple
failure to consider repurchase programmes was not a reason - this was
the only response to generate a statistically significant mean with a high
level of disagreement with the statement. These results tie in with those
reported in Table 4.2 in which just under 70% of the non-repurchasers
had indicated that they had sought approval from shareholders to use
repurchase programmes, although they had not actually enacted them.
Amongst the reasons cited, 45% of the respondents explained that they
were not in a position to use share repurchase programmes because
they lacked the surplus financial facilities with which to do so and 43%
explained that shareholder reaction to them was a cause for concern
(although 52% did not share that concern). In comparison, only 24% of
the respondents believed that the costs of share repurchases outweighed
the benefits while 52% actually disagreed with such a view.
Table 4.4 Reasons for the decisions not to use share repurchases
Reasons for not using share repurchases Agree Disagree Mean

(n = 22) % %
We have simply not considered them 9 82 1.73
We do not have surplus financial facilities with which to 45 45 +3.09
enact them
Any corporate benefits are outweighed by the costs/risks/ 24 52 +2.62
administrative burden
Our shareholders may view them negatively 43 52 +2.90
Notes:
1. This table reports the non-repurchasers views in relation to their reasons for not
using share repurchase programmes now or in the near future. The results tabulated
include the percentage agreement and disagreement levels and the mean scores of
the respondents based on a five point Likert scale where 1 is equivalent to strongly
disagree, 5, strongly agree and 3, no opinion.
+ Indicates mean score statistically insignificant from the value of 3 (no opinion).

Overall, the results in this section indicate that non-repurchasing

companies had generally considered the role of share repurchase
programmes within their financial management practices and over 50%
believed that they were a worthwhile consideration, with the benefits
of the tools outweighing associated costs. However, the lack of fund
availability and possible adverse shareholder response to repurchase
decisions appeared to dictate the final decision not to use them.
Non-investment companies and regulation
Respondent views - both repurchasers and non-repurchasers - were

sought in relation to the effect of existing regulations surrounding
repurchase activity and the need for additional regulation to protect
shareholder wealth. The results are shown in Table B, Appendix One.
As mentioned in chapter two, UK share repurchase activity is guided by
more stringent regulation than activity elsewhere such as the US and thus
the question arises as to whether UK listed companies are disadvantaged
compared with their counterparts elsewhere.
On the whole, respondents (66%) believed that existing regulation
enhanced the credibility of share repurchase activity, although views
in relation to whether the shareholder approval process educates
shareholders about share repurchase programmes were mixed; with
44% agreeing and 56% expressing no opinion or actively disagreeing
with the statement. An even more divergent view was apparent with
the statement that inquired into the restrictive role of current regulation
that places limits in the timing, volume and pricing of share repurchase
programmes: 33% agreed with the statement, 36% disagreed with it
and 32% were neutral - neither agreeing nor disagreeing.
Five additional statements inquired into the restrictive effects of
individual regulatory requirements. Respondents did not believe that
UK regulation curbed their repurchase activity and believed that the
regulation sufficed and had not led to an overuse or under-use of share

repurchase programmes, and that there was no need for additional

regulation to protect shareholder value.
There were some statistically significant differences between the
views on regulation of repurchasers and non-repurchasers. Repurchasers
on average disagreed more strongly than non-repurchasers with
statements 3d and 3f, indicating that as might be expected they found
regulation less inhibiting of repurchase activity than non-repurchasers.
Also, as might be expected, repurchasers believed more strongly than
non-repurchasers that existing regulations sufficed and there was no need
for additional regulations to monitor managerial actions.
Summary
This chapter presents the results of the responses from the 97

non-investment companies who participated in the study. They
indicate that repurchasing non-investment companies in the UK rely
principally on open market share repurchases, generally financed by
existing cash balances. Returning excess cash flows to shareholders
appears to be the dominant motive for repurchase use. Other factors
contributing to repurchase use include: influencing reported EPS levels;
signalling undervaluation to capital markets; and optimising companies
gearing ratios. Share repurchase programmes are not used in place of
regular dividend payments and appear to arise from a different set of
circumstances and situations. Moreover, they are not believed to be
used in response to a new and emerging market trend or as a protection
against potential takeovers, and surprisingly only 26% of companies use
them to seek to increase their corporate share prices.
In relation to capital reallocation and signalling managements
confidence in future income to the markets, while a significant
proportion of respondents (both repurchasers and non-repurchasers)
generally agreed with these two explanations, in practice, fewer than 25%
of repurchasing companies were influenced by either of these.

Comparing the views of non-repurchasers with those of

repurchasers, both groups have broadly similar perceptions: of the 33
statements posed only six generated significant differences between the
two groups. These results suggest that corporate circumstances rather
than managerial perceptions influence final decisions. In fact, adverse
investor responses to repurchase activity, and the lack of finance to fund
such arrangements, seem to prevent non-repurchasing companies from
engaging in repurchase activity.
Finally, with reference to the unique regulatory environment in
the UK where share repurchase activities take place within restricted
guidelines, UK financial managers appear to be satisfied with the
status quo. Indeed they believe that the regulation adds credibility to
repurchase activity and enhances its role in the corporate arena.
The next chapter examines the views of financial managers of
investment companies.

5 Financial Managers of Investment
Companies
Introduction
This chapter reports the results of responses from the financial managers
of investment companies. Motivations underlying the use of share
repurchase programmes may differ between investment companies and
non-investment companies owing to their differing characteristics.
As noted in chapter three, the respondent sample for this part of the
survey was smaller (53 respondents) than that for the non-investment
companies, possibly due the larger volume of non-investment companies
surveyed.
Of the 53 respondents, as reported in chapter three, 32 repurchased
shares in the period 2003 - 2007 (inclusive) and 21 did not. Table 5.1
summarises the basic financial characteristics of the two groups.
As is apparent from Panel A of Table 5.1, the mean market
capitalisation of the total respondent sample was 107 million, although
there was a large variation in individual company size ranging from zero
to 1,077 million. As was the case with the non-investment companies
discussed in chapter four, the repurchasing investment companies were
marginally larger than the non-repurchasing investment companies
(mean values of 110 million versus 102 million) although the
difference was not statistically significant.

Table 5.1 A summary of the respondents financial & market

characteristics
Panel A Financial characteristics

(n = 53) (n = 32) (n = 21)
mean max min mean max min mean max min
m m m m m m m m m
Market
capitalisation 107 1077 0 110 1077 10 102 535 0
Notes: The minimum value of 0 reflects the absence of a share price (and hence a
market capitalisation) at 31/12/2007 for the smallest company in the sample. That
company had a market capitalisation of 0.273 million at 30/11/2007 and 0.61
million at 31/7/2008.
Panel B Trust characteristics

No % No % No %
Venture capital trusts 19 36 14 44 5 24
Non-venture capital trusts 34 64 18 56 16 76
Nineteen of the respondents were Venture Capital Trusts (VCTs), a

type of closed-ended fund which offers generous tax benefits to encourage
investors to invest in venture capital (Table 5.1, Panel B). In order to
obtain these tax benefits VCTs have to comply with regulations that
are additional to those that govern normal investment companies.
In particular the majority of their investments must be in UK private
companies or AIM quoted companies. A consequence of this is that it is
more difficult to value the underlying portfolio; as a result VCTs tend to
produce Net Asset Value figures less frequently than normal investment
companies. The VCT respondents showed a greater preponderance of
repurchasers than non-VCT respondents, with 14 out 19 VCTs using
share repurchases during the survey period compared to 18 out of 34
non-VCTs.

financial managers of investment companies 69
Table 5.2 summarises the basic repurchase characteristics of the

repurchasing investment companies (Panel A) and non-repurchasing
investment companies (Panel B). Panel C presents the views of both
repurchasing and non-repurchasing respondents in relation to the broad
functioning of capital markets that may have influenced repurchase use.
Table 5.2 Investment company respondents: A summary of basic

characteristics
Panel A: Repurchasing investment companies (n =32)

Methods of share repurchases %
Open market repurchases 95
Dutch tender offers -
Tender offers 25
Private arrangement -
Method of financing share repurchases
Sales of investments 85
Long-term debt 5
Short-term debt 20
Management of shares repurchased
Cancelled immediately 80
Held in treasury for resale 35
Held in treasury for re-issue 10
Operations surrounding repurchase programmes
Existence of a formalised repurchase policy 61
Use of external advisors 65
Routine approval for programmes from shareholders 100
Panel B: Non-repurchasing investment companies (n = 21) %

Prior use of share repurchases 19
Approval of share repurchases prior to 2003 27
Approval of share repurchases between 2003 and 2007 86

Table 5.2 Investment company respondents: A summary of basic

characteristics (Cont)
Panel C: All investment companies: market views (n = 53)

Reinvestment versus share repurchases %
Percentage of respondent who rank reinvestment ahead of share repurchases as a 90
means of utilising surplus cash
Market efficiency Mean
To what extent are capital markets considered to be efficient, that is all historical 3.45
and publicly available information is accurately reflected in the companys share
price (five point scale from always (5) to never (1))
Importance of Net Asset Value (NAV) Mean
What level of importance do you consider investors place on NAV per share (3 2.81
point scale from great importance (3) to no importance (1))
Importance of Discount to Net Asset Value (NAV) Mean
What level of importance do you consider investors place on discount to NAV per 2.67
share (3 point scale from great importance (3) to no importance (1))
Panel A reveals that open market repurchases were the most

popular means of completing repurchases; they were used by 95% of
investment companies. A smaller number (25%) used tender offers;
these were more popular amongst the investment companies, however,
than their non-investment counterparts, where they were used by only
6% of respondents. None of the investment company respondents
used either private arrangements or Dutch tenders during the survey
period. Repurchases were mainly funded from sales of investments
although, as with non-investment companies, a small number reported
that repurchases were funded from short-term and long-term debt.
The repurchased shares were cancelled by 80% of respondents and
held in treasury by 45% of respondents (some respondents cancelled
some repurchased shares during the period but held others in treasury).
Investment companies thus made less use of the change in regulations
than the non-investment companies of whom over 60% held at least
some repurchased shares in treasury.

Compared to non-investment companies, a higher proportion

of investment company respondents (61% v 34%) had formalised
repurchase policies. All of the respondents sought approval from
shareholders for their use as a matter of routine rather than on a need-to
basis, and slightly under two thirds of the companies employed external
advisors to guide the repurchase programmes. In both cases these results
are marginally higher than those for the non-investment company
respondents.
Turning to the non-repurchasing investment company respondents,
only four companies (19%) had used repurchase programmes in the past
(prior to 2003). Compared with non-investment company respondents,
the proportion which had sought approval to repurchase their shares
without subsequently enacting repurchases was much higher (86%
compared to 68%) although it had been lower before 2003 (27%
compared to 48%).
The survey responses reveal that investment companies views on
market efficiency lay, on average between sometimes and almost all of
the time with no statistically significant difference between repurchasers
and non-repurchasers (Table 5.2, Panel C). Once again these views are
broadly similar to those of the non-investment company respondents.
Respondents believed that investors placed a great deal of importance on
both NAV and the discount to NAV with mean scores of 2.81 and 2.67
(out of 3). These results are even more supportive of the view that key
financial variables are important. Finally, 90% of respondents ranked
reinvestment ahead of share repurchases as a means of using surplus cash.
This section considers the views of respondents about the

motivations underlying share repurchases in general. Table A, Appendix
Two, includes the agreement/disagreement levels and the mean scores
based on both repurchasers and non-repurchasers (based on a five point

Likert scale in which 1 refers to strongly disagree, 5, strongly agree). It

also highlights any statistically significant differences between the views of
managers of repurchasing and non-repurchasing investment companies.
Table A, Appendix Two reveals that, on average, investment

companies believed that share repurchases increased the share price (mean
3.29), with half of the respondents agreeing to the statement compared to
just over one quarter who disagreed. The consensus view appeared to be
that share prices responded to repurchases gradually (mean 3.34) rather
than immediately (mean 2.63). However, there was little consensus
on the impact of announcements of repurchases; while 34% agreed
that they increased share prices, 32% disagreed and 34% were neutral.
Considering differences in views between the repurchasing investment
companies and the non-repurchasing investment companies, only
statement four, regarding prices responding gradually to a repurchase,
generated a statistically significant difference between the two groups.
Non-repurchasing investment companies were on average neutral as to
whether share prices responded gradually to share repurchases, with 30%
agreeing and 35% disagreeing, yielding a statistically insignificant mean
of 3.00. The typical repurchasers, on the other hand, agreed that share
prices responded gradually (71% agreeing and only 5% disagreeing,
yielding a mean of 3.67). In addition, a greater proportion of non-
repurchasers (30%) than repurchasers (10%) believed that share prices
respond immediately to a repurchase, although this difference was not
statistically significant.
These views suggest only limited support amongst investment
companies that it is announcements of repurchases rather than actual
repurchases which lead to price gains. However, as discussed in
chapter two, this greater emphasis on actual repurchases as opposed to
announcements may be explained by uncertainty about the commitment

of the company to actually make the repurchases (Akhigbe et al., 2007).

A further factor may be the fact that unless a trust is trading at a very
high discount to NAV or repurchases a high proportion of its shares,
the theoretical gains from discount capture will be small (and further
reduced by transactions costs).
A comparison of the views of managers of investment companies
with those of their non-investment counterparts reveals some differences
between the two. Specifically, a greater proportion of investment
companies (50% compared to 39%) believe that actual repurchases
increase share price but a lower proportion (34% compared to 42%)
believe that announcements of repurchases have that effect. However,
the two groups agree that price changes in response to repurchases are
gradual rather than immediate.
Net asset value and discount management
When asked about the relationship between repurchases and

both the NAV and discount to NAV, 93% of respondents agreed
that repurchases enhance NAV. This view, although shared by both
repurchasing and non-repurchasing investment companies, was held
significantly more strongly by the former. This level of support is
unsurprising, since if the shares are repurchased below NAV, such an
enhancement is mathematically inevitable. There were lower levels of
agreement on the impact of repurchases on discount to NAV with 49%
of respondents agreeing that repurchases reduced any discount whilst
slightly more (55%) agreed that repurchases reduced the volatility. These
results suggest some support amongst investment companies for the use
of repurchases to manage the discount to NAV.

Signalling future performance and corporate governance
The results in Table A, Appendix Two, show that respondents did not
generally view repurchases as being a response to poor past performance,
nor as a signal of improved future performance: with means of 2.17 and
2.05 respectively and disagreement levels of 76% in each case. Moreover,
share repurchase programmes were not deemed to signal a lack of future
growth opportunities; 66% of respondents disagreed with this statement,
which generated a mean of 2.34. Finally, there was a general lack of
consensus about the role of repurchase announcements in generating
publicity in the markets. Some 32% agreed with this view, 34%,
disagreed, and the mean response was a statistically insignificant 2.93.
Two statements regarding repurchases as a response to poor past
performance and as a signal of lack of future growth opportunities,
generated statistically significant differences in the mean scores between
the repurchasing investment companies and the non-repurchasing
investment companies. While both groups disagreed with these two
statements, repurchasers held their negative views more strongly.
As noted in chapter two, repurchases may signal an improvement
in corporate governance practices (through increased director oversight
and increased independence of/from the fund managers), but the
aggregate results in Table A, Appendix Two show little support for
this view amongst respondents; they only attracted support from 24%
of respondents and mean scores of 2.73 and 2.71 indicating that, on
average, investment companies disagreed with both statements.
Finally, it is perhaps worth noting that the investment companies
displayed a greater clarity in their views on signalling (generally hostile)
than non-investment companies whose views as noted in chapter four
are somewhat difficult to interpret.

Market liquidity and reissue considerations
Table A, Appendix Two reveals that investment companies on

average supported the idea that share repurchases improve market
liquidity and provide a useful means of managing supply and demand
for the companys shares; just over half agreed with the former statement
and 73% agreed with the latter. Indeed, as is apparent from Table 5.2,
35% of repurchasing investment companies held shares in treasury for
re-sale (as compared to 18% of repurchasing non-investment companies),
indicating that a sub-group of management take additional measures
to influence demand and supply levels. However, although investment
companies appear to utilise share repurchase programmes to influence
market liquidity, they do not consider such programmes as a method with
which to generate shares for reissue - 66% of the respondents disagreed
with this statement. These results are supported by the repurchasing
investment company respondents; only 10% of these held shares in
treasury for this purpose (as compared to 46% of repurchasing non-
investment companies).
The views of managers of investment companies in relation to
market liquidity also contrast with those of non-investment companies
discussed in chapter four. Over 60% of non-investment companies
disagreed with the view that repurchases improved liquidity whereas
56% of investment companies took the opposite view. One possible
explanation for this, suggested by Interviewee B, was that repurchases
might be perceived as having a more significant impact on liquidity for
investment companies than for non-investment companies; investment
company shares tend to be traded less frequently than those of non-
investment companies, hence, repurchases might have a greater impact
on liquidity for the former than for the latter.

Capital structure
As is apparent from Table A, Appendix Two, respondents views on

capital structure reveal that investment companies did not in general
see this as an important motive for repurchases. Only one respondent
agreed that share repurchases are used to increase gearing ratios whilst
over 63% disagreed. These results contrast with the views of managers
of non-investment companies where over 50% agreed with a similar
statement. The difference may reflect the absence of tax relief on debt
interest for investment companies which as noted by An et al. (2007)
makes gearing less attractive. Nevertheless, as mentioned in chapter two,
some investment companies are geared and indeed as seen in Table 5.2,
a proportion of investment companies sought to fund their repurchase
programmes with debt. Moreover, the statement generated a statistically
significant difference between the views of managers of repurchasing
investment companies and non-repurchasing investment companies.
While both groups shared their disagreement in relation to the role of
share repurchases in influencing gearing ratios, repurchasing companies
held stronger views on the issue.
A further contrast between the views of managers of investment

companies and non-investment companies is revealed when the results of
the two company types are compared in relation to capital reallocation.
While close to 70% of the non-investment company respondents agreed
with the view that shares are repurchased when they represent a better
investment option than alternatives open to the company, there was
a lack of consensus amongst the investment companies on this topic.
Specifically, 39% agreed with the statement but 39% disagreed. While
the mean of 2.85 suggests that, on average, investment companies
disagree with this, the average score is not statistically significant and

probably reflects a wide disagreement between investment companies

on the issue.
As noted previously, shareholder approval for share repurchases

was sought by investment companies as a matter of routine rather
than a specific need. Nevertheless, Table A, Appendix Two reveals that
investment companies believed that shareholder views were an important
consideration in relation to repurchases with 93% agreement and no
respondent disagreeing. Shareholders were seen as the major beneficiaries
of such programmes, and although both sellers and non-sellers were
seen as benefiting from the programmes, sellers were seen as more likely
to benefit. Brokers and advisors were also seen to benefit by 55% of
respondents. Management was not seen as a beneficiary and nearly 70%
of respondents disagreed with a statement that put this view forward;
the mean was 2.33. Overall, the results are broadly in line with those
expressed by non-investment companies (Table A, Appendix One).
However, there are some differences such as the clearer view expressed
by investment companies that management do not benefit from share
repurchase programmes in comparison to non-investment companies
who are broadly neutral on this question. This difference in results
may well reflect the fact that, as noted by An et al. (2007), repurchase
decisions in investment companies reduce the size of the investment fund
and management fees tend to be based on size. Further, non-investment
companies are ambivalent on whether sellers or non-sellers are the main
beneficiaries from repurchases.
Table A, Appendix Two, reveals little support amongst investment

companies for the view that other reasons explain share repurchases.
Specifically, share repurchases are not seen as being popular just because

they are fashionable (63% disagreement) nor are they believed to be more
appropriate in falling rather than rising markets (59% disagreement). These
views are similar to the opinions expressed by non-investment companies
(Table A, Appendix One).
Motivations underlying actual share repurchases
This section considers the specific motivations underlying the actual

repurchases carried out by repurchasing respondents together with those
identified as likely motivations by non-repurchasing companies who
indicated that they might carry out repurchases in the short to medium-
term future. Any comparison between the two groups must be treated with
caution since the latter group includes only nine respondents.
Table 5.3 summarises the results and reveals that managing the
discount, NAV and share liquidity considerations are the most important
motivations for repurchases by investment companies. Specifically, 93%
cite discount reduction and 70% highlight discount volatility as the key
motives underlying their repurchase programmes, whilst 47% cite increasing
NAV as a motive. Share liquidity considerations are also significant; 40%
cite management of supply and demand for their shares and 30% highlight
increasing the liquidity of their shares as specifically motivating their
repurchase activity. The importance of investor views is also evidenced by
the fact that 63% characterised their repurchases as being (at least in part) a
response to investor expectations. Of the other specific motives identified,
only increasing share price (20%) garnered much support whilst several,
including signalling and gearing attracted no positive responses.
Turning to the non-repurchasing companies, a fairly similar pattern
emerges: discount management, NAV and share liquidity considerations,
and investor expectations all attract support whilst 5 out of 9 non-
repurchasing investment companies cite increasing share price as likely to
motivate them to initiate share repurchases. None of the remaining specific
motives attracted any support.

Table 5.3 Motivations underlying actual share repurchases
Repurchasers Non-repurchasers
(n = 32) (n = 9)
Motivational factors % %
To reduce discount to NAV 93 78
To reduce the volatility of discount to NAV 70 44
To respond to investor expectations 63 44
To increase NAV per share 47 22
To better manage supply and demand for the 40 78
companys shares
To improve the liquidity of the shares in the market 30 33
To increase share price 20 55
To respond to market trends 10 0
To invest in the best available investment opportunity 7 0
at the time
To signal an improvement in corporate governance 3 0
To signal an expected improvement in future 0 0
performance to investors
To respond to poor past performance 0 0
To increase the firms gearing ratio 0 0
To provide shares for reissue 0 0
To respond to falling markets 0 0
Notes: This table captures the views of the repurchasing investment companies and
the nine investment companies from the non-repurchasing group who indicated that
they were likely to (and highly likely to) use share repurchase programmes in the short
to medium term future.
Overall the results reported in this section are consistent with the
generalist views reported earlier in this chapter. Share repurchase use in
investment companies is dominated by the management of NAV and the
share price discount which are specific to investment companies; market
liquidity, which could apply to both investment companies and non-
investment companies, was also important for investment companies
in contrast to their non-investment counterparts where it did not play
an important role.

Reasons for decisions not to participate in share

Table 5.4 records the reasons for the non-use of share repurchase
programmes amongst those investment companies which have not
used them and which indicated that they were unlikely to do so in the
short to medium-term future. All of these respondents appear to have
considered repurchase programmes but have rejected them for a variety
of reasons. Fifty eight per cent explained that they see no benefits from
using them and 42% believe the costs of such programmes outweigh the
benefits. In neither case, however, are the means statistically significant,
indicating a large diversity in views. Finally, shareholder disapproval did
not appear to be a concern with only 8% of respondents agreeing that
shareholders might view repurchases negatively. Overall, in contrast to
the non-investment companies, the reasons for the lack of use of share
repurchase programmes in investment companies differ. Specifically,
non-investment companies appear more concerned with shareholder
disapproval and less concerned with the imbalance between their
potential benefits and costs than are investment companies.
Table 5.4 Reasons for the decisions not to use share repurchases
Agree Disagree Mean

Reasons for not using share repurchases (n = 12) % %
We have simply not considered them - 100 1.50
We see no potential benefits from using them 58 33 +3.17
Any corporate benefits are outweighed by the costs/
42 8 +3.42
risks/administrative burden
Our shareholders may view them negatively 8 42 2.33
Notes:
1. This table reports the non-repurchasers views in relation to their reasons for not
using share repurchase programmes now or in the near future. The results tabulated
include the percentage agreement and disagreement levels and the mean scores of
the respondents based on a five point Likert scale where 1 is equivalent to strongly
disagree, 5, strongly agree and 3, no opinion.
+ Indicates mean score statistically insignificant from the value of 3 (no opinion).

Investment companies and regulation
This section considers the investment companies views on the

regulation of share repurchases as presented in Table B, Appendix Two.
This table reveals that, on average, investment companies agreed that
current regulation enhances the credibility of share repurchases (mean
3.61, 68% agreement). There was also support for the role of the
shareholder approval process as an educational mechanism although to a
lesser degree; 53% agreeing with this statement generating a statistically
significant mean of 3.29. On average, investment companies did not
agree that existing regulations restrict their repurchase activity. Further
they did not see any need for additional regulation with close to 70%
disagreeing that shareholders need more protection and that repurchases
have spiralled out of control.
Overall these views are broadly similar to those of the non-
investment companies discussed in chapter four, although the latter,
in general, held these views more strongly than investment companies.
Summary
This chapter presents the results of the responses from the 53

investment companies who participated in the study. In common with
their non-investment counterparts, repurchasing investment companies
rely principally on open market share repurchases, although one quarter
of investment companies also use tender offers. The main factors
contributing to repurchase use appear to be managing NAV and discount
to NAV which are specific to investment companies. Managing market
liquidity which has a more general relevance to all companies was also
regarded as important by investment companies. Other factors such
as signalling and capital structure considerations appear to have played
little or no role.

These results are consistent with the generalist views on the motives
underlying share repurchases expressed by both repurchasing and non-
repurchasing investment companies. In general, there appear to be few
significant differences between the perceptions of the two groups, of
the 27 statements seeking their views only four generated statistically
significant differences between repurchasers and non-repurchasers.
Moreover, in those cases, the differences reflected the fact that whilst
repurchasers and non-repurchasers held the same views, repurchasers
held them significantly more strongly.
In relation to the regulation of repurchase activity, managers of
investment companies appear to be satisfied with the current position
showing little appetite for further laws in this area.
Finally, comparing the views of managers of investment companies
to those of non-investment companies reveals a number of differences.
Investment companies are more likely to agree that repurchases increase
share price than non-investment companies. They also, in contrast
to non-investment companies, see share repurchases as a means of
enhancing market liquidity. On the other hand, some reasons which
attract support from the non-investment companies are rejected by
investment companies, for example, capital reallocation and capital
structure. These differences, for the most part, probably reflect the
different characteristics of investment and non-investment companies
alluded to in chapter two.
The next chapter reports the results of the investor survey and
interviews with three institutional investors.

6 The Views of Investors
Introduction
This chapter presents the results of the survey element that related
specifically to the investor community, namely the institutional investors
and the private investors. Following the structure of the questionnaire,
the chapter commences with a description of the characteristics of the
respondents and proceeds to consider the respondents views in relation
to: (i) the general motivations underlying the use of share repurchase
programmes in UK companies; and (ii) regulation surrounding share
repurchase activity in the UK. Insights from the interviews are also
presented where appropriate, although these views were obtained from
only three participants and are therefore not generalisable.
Fifty seven usable questionnaires were received from the investor

community: 18 from institutional investors and 39 from private
investors. Table 6.1 summarises the basic characteristics of the two
groups. In an attempt to capture a wider range of institutional investors,
four different groups of investors were approached but as is apparent from
Panel A of Table 6.1, none of the investment trust companies participated
in the survey. Of the 18 respondents, 50% were pension funds, 39%
trusts/open ended investment companies and 11% assurance companies.
One possible reason for the lack of response from the investment trust
companies is that the questionnaires were sent to a generic contact
(for example The Primary Investment Manager) and not to named
individuals so the covering letters were not personalised. In the light of

the relatively low response level from institutional investors, the results
in this chapter, particularly those pertaining to institutional investors,
should be viewed with caution.
In relation to the characteristics of the private investors (Panel B),
29% of the investors invested less than 10% of their savings in UK
shares, 32% invested between 10 and 20% and 40% invested more than
20% of their savings in UK shares. A higher level of participation in the
survey by investors with a higher proportion of their savings invested in
company shares is perhaps unsurprising since these investors were more
likely to be interested in topics related to investment and in turn the
results of this study. Only 15% of the respondent investors stated that
they relied on professional advice for their investment decisions, and
only 15% stated that they were unaware of whether or not the companies
that they invested in engaged in share repurchase programmes. Broadly
these results indicate that the responding investors had some knowledge
of share repurchase programmes. This view was indeed confirmed
when just over half the respondents described their knowledge of share
repurchase programmes as reasonable, and less than one quarter, poor.
Once again, this tendency is perhaps unsurprising as only those investors
with some knowledge of and interest in share repurchase programmes
were likely to choose to participate in the study.

the views of investors 85
Table 6.1 Investor respondents: characteristics
Panel A: Institutional investors

Type of Institution %
Pension fund 50
Life assurance 11
Investment trust company 0
Unit trust/Open-ended Investment Companies (OIECs) 39
Panel B: Private investors

Proportion of savings invested in UK shares %
Under 10% 29
10% - 20% 32
Over 20% 40
Do you use professional advisors when making investment decisions? %
Yes 15
No 85
Are you aware that companies in which you invest engage in share repurchase? %
Yes 85
No 15
Understanding of share repurchase programmes %
Very good 5
Good 21
Reasonable 54
Poor 21
Very Poor 0

Table 6.1 Investor respondents: characteristics (Cont.)
Panel C: Private and institutional investors

All Private Institutions
Objectives of investment in shares % % %
Regular dividend income 7 10 0
Capital appreciation 49 54 39
Both 35 33 39
Other 9 3 22
Do you vote at general meetings? % % %
Yes in person 2 3 0
Yes by Proxy 68 59 89
No 30 39 11
Participation in repurchase approval process % % %
Yes 42 51 72
No 58 49 28
Support for repurchases % % %
Always 28 27 31
Sometimes 64 62 69
Never 8 12 0
In terms of the investment objectives of the two samples (Panel C,

Table 6.1), investors generally focused either on capital appreciation alone
or a combination of a capital appreciation and dividend income; only a
small minority of private investors were interested in dividend income
alone. Unsurprisingly, a larger proportion of institutional investors
in comparison to private investors voted at annual general meetings
(AGMs) (89% versus 62%), and they were more likely to participate
in the repurchase approval process (72% versus 51%) than their
private counterparts. In both cases, investors appeared to be selective
in their approval of share repurchase programmes, suggesting that the
circumstances underpinning the programmes appeared to provide an
important context. Nevertheless, Interviewee A commented that, in

his experience, the process of shareholder approval had become more a

formality than a rational decision making exercise on the part of investors:
The resolution looks .. the same as last year and the year before and
so inertia sets in and you get very high levels of approval. Its
a non-contentious resolution, shareholders have passed it in high
majorities in the past and continue to do so. One reason for the
continuation to do so is a complete blindness to whats going on.
Interviewee C shed a different light on the situation stating that

his fund generally approved the use of share repurchase programmes to
provide management with an additional financial management tool, but
at the same time it monitored repurchase activity to ensure that they
were being used for valid reasons:
We nearly always approve the resolution its not to say if we

felt that a company was in a particular position and a share
buyback was inappropriate, [although] we might have supported
the resolution we would express our views that embarking on
that programme may not be appropriate. .. we give them that
flexibility to do a buyback and then should it be inappropriate
wed certainly express our views.
As such the difference in perception between Interviewee A and the

results of the survey may in part be explained by the view presented by
Interviewee C that shareholder responses may generally be routine but
that they are not necessarily a result of a blind process.

This section and Table A, Appendix Three presents the results of the
questionnaire sub-section that inquired into respondents views about
the motivations underlying the use of share repurchase programmes
in general terms; statements were closely aligned to those in the
questionnaire sent to non-investment companies to enable a comparison
between the views of investors with those of financial managers.
When investors were asked about the relationship between the use
of share repurchase programmes and share price rises, they generated
response patterns similar to those of financial managers. Specifically, like
financial managers, investors viewed share repurchase programmes as
leading to a share price rise, although the mean of 3.17 was statistically
insignificant and only 41% of investors actually supported this view.
Investors, like managers, generally believed that any price response to
a repurchase was not immediate but likely to be gradual taking place
over a relatively lengthy period. Moreover, just as financial managers,
the proportion of investors who believed that repurchase programmes
led to share price rises was similar to the proportion who believed that
announcements of intentions to repurchase shares were an important
factor contributing to such a rise.
Overall, the results indicate that investor views were closely aligned
to those of managers, with a divide between investors who believe
that share repurchase programmes directly influence company value
and those who believe that repurchases do not drive company value.
Moreover, investors lent support to the longer-term potential of share
repurchase programmes but generally gave only limited support to the
role of announcements of repurchases as compared to actual enactments.

One area of concern, as Interviewee A explained, was the possible

overuse of such programmes which in turn rendered them ineffective:
More of the use to me is the abuse as most of the use is poor, its
poor performance, [the] poor use of capital [Repurchases] are a
tool Id expect them [companies] to have ... its how they use it
There are some companies that do use share buy-backs selectively
and effectively ... Id say its an 80:20 split: bad 80% of the times
and good the [remaining] 20%.
Indeed this interviewees view may serve to explain the diversity in

the views amongst the investors surveyed in that he explained that while
some investors may, from their experiences, be more critical about the
roles of share repurchase programmes, others may implicitly consider
share repurchase programmes to add value because they naively think
that share repurchase programmes have to be positive [and] so theyre
the thing to support (Interviewee A).
Moreover, Interviewee C explained that the link between a share
repurchase programme and company value is not a direct one but that
the relationship relies on managerial intentions and market perceptions
of these intentions. Thus, in the absence of these factors the relationship
may not necessarily materialise. Couching the relationship between share
repurchase programmes and company value in the context of influencing
gearing, he explained:
Over time if theyre [share repurchases] used appropriately and

where the market feels [that] the debt to equity ratio is about right,
thats where it can help to maximise firm value.
On comparing the differences in responses between private investors

and institutional investors, it becomes apparent that institutional
investors were much less convinced that share repurchase programmes

led to a share price rise than their private investor counterparts (28% of
institutional investors agreed compared to 47% of private investors who
supported the statement with mean scores of 2.78 and 3.36, respectively).
While the small number of institutional responses may be responsible
for this discrepancy (and the mean of 2.78 is not statistically different
from 3 - no opinion), the survey results, together with insights from the
interviews, suggest that institutional investor scepticism was prevalent
in relation to several other areas relating to share repurchase activity.
Addressing the difference between non-investment companies and
investment companies, an additional consideration that Interviewees
A and B raised was that share repurchase programmes seemed a more
natural tool for investment companies:
For investment companies the discount to NAV... is an

example of the company taking a fairly sensible approach from
first principles. (Interviewee A)
I am less convinced that share buy-backs in a non-investment

company arena can demonstrably add value for shareholders on
an on-going basis. (Interviewee B)
Repurchases versus dividends
Investor views in relation to dividend substitution broadly mirrored

those of financial managers, although there was a distinct variation in
the strength of the views expressed. Specifically, investors, like financial
managers, did not see share repurchase programmes as a substitute for
regular dividend payments or a substitute for increases in such payments
with 60% and 54% disagreeing respectively. However, their views were
less extreme than those of financial managers (mean scores of 2.45 versus
1.71 for statement 1 and 2.74 versus 2.08 for statement 2). Private
shareholders, who appeared to assume fairly neutral positions, were,

however, responsible for the less extreme views; the views of institutional
investors, as confirmed by Interviewee A, were much more closely aligned
to those of financial managers:
Markets exaggerate their response when youre cutting a dividend

or passing on it completely. With share buy-backs, although theyve
become an annual event in terms of shareholder approval, they
seem to be used in a less regular, consistent, recurring, stable trend
kind of way.
In addition, while investors in aggregate leaned towards the view

that share repurchases are a substitute for special dividends (52%
agreeing, generating a mean of 3.22), their views, unlike those of
financial managers (3.59 with 67% agreeing), were not statistically
significant. Finally, while both investors and financial managers agreed
that share repurchases offer a flexible means with which to return wealth
to shareholders, managers expressed stronger views on this topic than
investors (mean scores of 4.05 and 3.43, respectively). The difference
between the managerial and investor views, it would appear, was partly
driven by private investors responses.
Overall, both managers and investors refuted the substitution
effect in relation to regular dividend payments, although managers
believed repurchase programmes to be a flexible means with which
to return surplus cash to investors and to be broadly akin to special
dividends; a sub-group of investors, however, had reservations about
the role of share repurchases in this capacity. The somewhat different
views between management and investors in relation to the flexibility
and substitutability of share repurchase programmes can be explained
by the characteristics of these programmes, as highlighted by two of
the three interviewees; Interviewee C expressed an indifference between
share repurchase programmes and special dividends from his companys
perspective, although he recognised there could be a difference for private
investors. Interviewees A and B explained that special dividends are

more equitable and represent a more certain distribution of resources

to investors in comparison to share repurchase programmes in which
only the sellers receive the rewards and there is little certainty associated
with these gains. This situation is further compounded by the use of
open market share repurchase programmes in which the surplus cash
distribution cannot generally be anticipated by investors or signalled
by management.
Id rather like to see more special dividends Id like to see them

set that [repurchase] option against paying a special dividend or
another form of distribution. (Interviewee A)
Its [share repurchase activity] probably a means of actually

drip-feeding excess cash that companies have in relatively small
measure back to shareholders, but I really think its not equitable
because not all shareholders have a facility to access a share buyback
whereas a more equitable treatment would be to return that capital
to all shareholders or give all shareholders a right to receive that.
Now you can do it by dividends, by a special dividend, you could
undertake a tender offer, you could even have a general capital
distribution by which a company issuing B shares, which are
subsequently redeemed at a certain value. (Interviewee B)
At the same time, the drip-feed approach as described by

Interviewee B, offers management more flexibility than special dividends
since management do not have to commit themselves to a set sum and
have the opportunity to deviate from the intended repurchase value and
also time their repurchases to suit the business cash flow cycles.

Signalling undervaluation/future performance
Forty-seven percent of investors believed that share repurchase

programmes serve to signal undervaluation of a companys shares while
52% of investors view share repurchases as an indicator of managements
confidence in future earnings/share prices to the external markets. As
with managerial views on these topics, there was marginally higher
support for the latter than the former.
Interestingly, Interviewee B also explained that when share
repurchases take place following price decline (theoretically to signal
undervaluation), for investors who believe that the shares are actually
fairly priced, the repurchases signal a weakening of future prospects rather
than an improvement since share prices are forward looking indicators:
Probably most of the share buy-backs are undertaken because share

prices have fallen. Given that share prices tend to be forward
looking indicators it may well be that share price has fallen
because the companys prospects are deteriorating in the views of
the market rather than improving I think youll probably find
that buy-backs are undertaken under situations of shall we call it
distress of various degrees rather than in anticipation of a dramatic
improvement in business prospects.
Amongst the survey respondents, however, this was a minority view
and only 19% disagreed that repurchase programmes signal management
confidence to the markets.
Amongst those who agreed that share repurchases signal future
income capacity to markets, a larger proportion of investors (33%)
believed that share repurchases signalled a transient rise in future
earnings, than a more permanent rise (17%). Finally, in contrast to
the views of the financial managers who took a neutral stance on the
issue (mean score of 3.09), investors generally agreed that repurchase
announcements served to generate publicity in the markets with some

57% agreeing that this was the case, resulting in a mean score of 3.48. In
other words, while managers did not consider announcements to capture
investor attention, investors actually took note of such announcements.
In terms of differences between private and institutional investors,
there was only one statistically significant difference and this related to
the nature of the signal in relation to future income changes. While
both sets of investors agreed that share repurchases did not generally
signal a permanent rise in income, institutional investors views on this
matter were more extreme.
Investors broadly supported managerial views that companies arrive

at their share repurchase decisions after they have made their capital
structure and investment decisions; however, their level of support for
this argument fell short of that of managers (mean of 3.49 versus 3.86
for the former and 3.54 versus 3.98 for the latter). In addition, the
reported mean score for the statement that inquired into the influence
of repurchase programmes on corporate gearing levels although positive,
indicated that, on average, agreement was lower than that recorded for
managers. Reflecting a no opinion view from a significant proportion
of private investors, these results indicate that private investors were not
convinced about the role of share repurchase programmes in shaping
corporate balance sheets.
The statement relating to the agency cost explanation generated

one of the higher means (3.62) from the investor community, indicating
that investors in general agreed that share repurchases serve to manage
agency considerations by returning surplus cash to shareholders. Sixty
percent of investors overall took this view and support was particularly

strong amongst institutional investors (89% agreement). This contrasts

with views of financial managers who took a broadly neutral view of
this statement (mean score of 3.15) with only 40% agreeing. The lower
managerial support is perhaps unsurprising since management otherwise
implicitly indicate the presence of principal-agency problems.
Interestingly, together with share repurchase programmes serving
to alleviate principal agency considerations, as seen later in this chapter,
investors believed such tools to serve managerial interests at the expense
of investors.
Capital reallocation suggests that share repurchases enable

companies to return surplus cash to investors when there is an absence of
value enhancing investment opportunities and allow investors to re-invest
their funds in investments of their choice. Moreover, companies may
be inclined to invest in their own shares, if they deem this to be the best
available investment opportunity at the time. Like financial managers, as
noted in chapter four, the investor community also agreed with these two
views with greater support for the former; Interviewee C commented:
The other hypothesis that it [share repurchase programme] signals

is... we havent got a better way of investing our excess cash and
we are returning it to you as shareholders, and that gives us the
opportunity to make investment decisions and we certainly buy
that...
For both statements, however the level of support provided by

investors was somewhat weaker than that provided by managers. This in
part stemmed from a lower agreement level from the private shareholders,
who were, in general, also considered to be the subsidiary beneficiaries
of the redistribution process.

In relation to stakeholder considerations, although investors believed

that shareholder views/requirements were an important consideration
when reaching share repurchase decisions with 65% agreeing and a
mean of 3.65, they held this view less strongly than corporate managers
where 83% agreed with a mean of 3.95. In addition, both private and
institutional investors believed that the latter were the more significant
beneficiaries of share repurchase programmes (mean 3.87) than
private shareholders (mean 3.27). One possible reason for this, as two
interviewees explained, was that large institutional investors were likely
to have closer working relationships with companies and, in turn, more
insight and also more influence on the specific details of such exercises.
As noted earlier, Interviewee C commented that his organisation would
consult with companies about their use/misuse of share repurchases.
Comparing the relative benefits to private shareholders, management
and advisors, more investors viewed management (65%) and bankers/
advisors (62%) as beneficiaries from such programmes than private
investors. These results contradict those of managers and highlight the
presence of principal agency considerations recorded in chapter four.
Indeed all three interviewees commented that one potential area for
managerial benefits lay in relation to their reward structures, which if
linked to market movements on EPS, would encourage the use of share
repurchase programmes. Even though Interviewee C commented that
his firm would attempt to discount the EPS level to eliminate the effect
of the repurchase on the EPS level to determine the true EPS level to
accommodate such manipulation, benefits to managers would continue.
The possible benefits of share repurchase schemes to brokers
and advisors generated mixed views amongst the three interviewees.
Interviewee A explained that this stakeholder group benefited from
commissions and fees and were also responsible for heavily promoting
the use of share repurchase programmes to companies. Interviewee B,

on the other hand, explained that from his experience as a user of share
repurchase programmes, commission charges were minimal, outstripped
substantially by other costs such as stamp duty. Interviewee C agreed
with Interviewee A but commented that while bankers and advisors were
likely to promote the use of share repurchase programmes to fulfil their
own interests, it is incumbent on the directors to manage the company
with their fiduciary hat on, and that while banks and advisors were a
likely catalyst in repurchase activity, both management and investors,
who are also known to encourage repurchase activity, need to accept
responsibility.
Investors believed that sellers of repurchase programmes were more
likely to benefit from share repurchase programmes than non-sellers
who continued to retain company shares. These results tie in with the
view that repurchase programmes do not necessarily have share value
implications, and also the recurrent view that sellers benefit from the
redistribution process. Nevertheless, they are inconsistent with the views
of managers who believed that both sellers and non-sellers benefited
from such programmes.
Finally, in terms of differences between private and institutional
investors, there were two statistically significant differences, which
related to signalling future income changes to the markets. One,
private investors were more positive about the role of share repurchases
in signalling future income, while institutional investors on average
had no opinion, and two, while both sets of investors agreed that
share repurchases did not generally signal a permanent rise in income,
institutional investors views on this were more extreme.
While investors expressed support that share repurchase

programmes are used by companies to influence reported EPS levels, the
level of support generated was weaker than that expressed by companies

themselves. Specifically, while 76% of managers agreed with this

statement, only 54% of investors agreed with it and the means recorded
for the two groups were 3.83 and 3.33, respectively. These results may,
however, be explained by Interviewee Bs view that the influence of share
repurchase programmes on reported EPS are likely to be marginal with
other factors playing a far greater role. The restrictive limits on the
volume and timing of share repurchase programmes in the UK perhaps
contribute to this marginal effect. Nevertheless, as all three interviewees
had indicated, the role of share repurchase programmes where managerial
reward structures were linked with reported EPS levels were noteworthy,
and monitored by investors. In these situations the EPS levels were
discounted to accommodate the impact of repurchase activity.
Reissue considerations
Thirty nine percent of investors agreed that share repurchases are

used to generate shares for re-issue, broadly the same proportion as for
financial managers, although the mean score of 3.24 is higher than that
for managers. A slightly higher proportion, 44%, was neutral, while
only 17% disagreed. This contrasts with the managers where some 32%
disagreed suggesting greater diversity of opinion within the manager
group than within the investor cohort.
In contrast to the view held by managers that share repurchase

programmes do little to ward off potential take-overs (Vermaelen, 2006),
a significant percentage of investors (49%) believed that the programmes
can be utilised in this way. This view was, however, primarily driven
by the views of private shareholders who positively agreed with this
statement; in fact, institutional investors disagreed with it.

Interviewee As strong view that:
Share buy backs have become such a commonality... people are not
even thinking if its a good thing or a bad thing...
...was shared by over 40% of the survey respondents who on average

agreed that the rise of share repurchase programmes is a result of a trend.
Interviewee C, however, also noted that while companies were largely
responsible for enacting repurchase programmes, the investor community
also played an important role in influencing and encouraging managerial
behaviour. Further, he added that repurchase activity was indeed a fad
during the boom period that was likely to fade away during the bad times.
Moreover, unlike managers, investors broadly believed that share
repurchases served to improve the market liquidity of the shares, although
the mean score was statistically insignificant and views were spread across
all three possibilities (agree/disagree and no opinion). This in part reflects
diversity in views between private investors and institutional investors
with the former highlighting positive liquidity effects whilst the latter
disagreed with that view. Interestingly, the views of private investors
seem more in line with those of investment companies discussed in
chapter five, although as noted in that chapter their support for positive
liquidity effects may reflect the specific characteristics of their companies.
Finally, there was some disagreement between managers and investors
in relation to the role of share repurchase programmes: (i) in rising/
falling markets; and (ii) influencing future payout levels. Specifically, a
significant proportion of both managers and investors voiced no strong
opinion in relation to the relevance of market conditions, although of
those who did, investors more frequently agreed that share repurchases
are more appropriate in falling rather than rising markets, and managers
more frequently disagreed with this. The wide diversity in results for both

managers and investors, and the high levels of no opinion are perhaps
explained by a variety of different situations that materialise in particular
market conditions. Mitchell et al. (2001) explain that share repurchase
programmes may gain popularity in downward markets as companies
may be reluctant to distribute cash dividends which, subsequently,
may have to be reduced. In contrast to this proposition, Interviewee
C explained that poor market conditions (the credit crunch at the time
of the interview) were likely to curb repurchase activity since this could
be seen as preferable to reductions in cash dividends. Moreover, he
explained that markets would be less willing to accept increases in gearing
levels associated with repurchase activity in such market conditions thus
again driving down repurchase activity.
Furthermore, Interviewee B explained that alongside market
conditions, there are a number of company specific conditions that
are also relevant. Specifically, he made a case for share repurchase
programmes in situations of deteriorating company prospects, but also
recognised their role when companies were in stronger positions:
A lot of the factors drive buy-backs .. [it] is the economic picture as

well as the stock market cycle. Companies have had strong profits
[and] strong balance sheets, .... so theyve perhaps had excess funds
and theyve been able to potentially feed that back to shareholders
through various mechanisms ... So companies are in a stronger
position to undertake share buy-backs ... At the same time ... weve
had share prices falling at a time when, for a lot of companies, the
business has been reasonably healthy and the balance sheets have
been reasonably healthy [and] from that point of view, they have
the power to undertake share buy-backs.
In relation to the role of repurchase programmes influencing future

payment levels, private investors, it appears, were responsible for the high
agreement level with this issue while institutional investors mirrored the

views of managers, that share repurchases played no significant role in

affecting future dividends.
Regulation surrounding share repurchases in the UK
Consistent with chapters four and five, this section reports the results
of the investors views in relation to regulation surrounding repurchase
activity in the UK (see Table B, Appendix Three). Further, it compares
the results reported with those of corporate managers as presented in
chapter four.
Consistent with managerial views, investors believed that existing
regulation enhanced the credibility of share repurchase activity, although
this view was driven by a high agreement level (72%) from private
investors. Private shareholders, indeed, also believed that the requirement
to seek shareholder approval enabled companies to educate shareholders
(mean score 3.75) although this view perhaps unsurprisingly was not
strongly shared by either the financial managers (mean score of 3.13)
or the institutional investors (mean score of 3.17).
The statements, which inquired into the restrictions that current
regulation places on the usability and value of share repurchase
programmes, generated statistically insignificant means which were
matched with a high percentage of no opinion responses. Investors,
in other words, had no real opinions about the influence of current
regulation in relation to the volume, timing and pricing of share
repurchase programmes, or with the reporting requirements and
regulation surrounding intentions to hold shares in treasury. This
contrasted with the views of financial managers who, whilst neutral
on the impact of volume, timing and pricing restrictions, did not
view regulations regarding treasury shares or reporting requirements as
restrictive.
Interestingly, when investors were questioned about the influence
of their involvement in the approval process on share repurchase use

and value, they tended to agree with the statements put forward,
indicating that their involvement served to contain repurchase practice
within allowable limits. Considered alongside the views of financial
managers, who broadly believed that shareholder involvement did not
limit corporate practice, these results suggest that each group is content
with shareholder involvement, one believing that they as a stakeholder
group play an important role in the process and the other, that this
involvement does not interfere with corporate practice. Interviewee A,
however, did not share the majority investor view and suggested that
the investor approach at the approval stage was too passive as inertia
appeared to rule.
Finally, in relation to the final two statements in this sub-section,
while sub-groups of investors believed that share repurchases had spiralled
out of control and that more regulation was required to protect investor
interests, there was a wide diversity of responses among investors and
the mean results were consequently statistically insignificant. No
strong overall view could be discerned in contrast to the responses of
financial managers, who, perhaps unsurprisingly, distinctly disagreed
with both statements. While describing current regulation as protecting
shareholder wealth superficially, Interviewee A explained that additional
disclosures, in which management actually accounted for their actions,
post-event, were required to enable investors to monitor managerial
performance and also inform future approval strategy.
Companies do this sort of thing but theyre not very good at

explaining to shareholders why they do them, or having got the
approval .. not being very good at accounting for their operations
within that policy as to whether it has been in the best interests
of shareholders or not. Theres a tendency to get approval from
the shareholders for transactions and theres very little post-event
reporting, that is, whether the transaction has lived up to its
expectations or not. Youve really got to do a lot of digging in

financial statements and other places to extract the info. If you

had cumulative reporting youd have more meaningful discussion
around the subject... [at the AGMs]
However, as Interviewee B explained, assessing the value of a

repurchase programme in a non-investment company is very challenging
(vis a vis investment companies), which ironically also permits its
continued high use.
Summary
This chapter presents the results of the survey aimed at the

investor community. On the whole, examining the mean scores of the
responses from investors and managers in relation to statements about
the motivations underlying share repurchase programmes, it appears
that investors as a group adopt a more middle of the road approach
in their views than their corporate counterparts; they were less extreme
in supporting/refuting the motivations included in the questionnaire.
Specifically, the highest and lowest scores for management were 4.15
and 1.71, relating to capital reallocation and dividend substitution,
respectively, while those for investors were 3.87 and 2.45 relating to the
role of share repurchase programmes for institutional investors and to
dividend substitution, respectively. One possible reason for this may be
the diversity of views expressed by investors as seen during the interviews.
There were a number of reasons that attracted more support from
management than investors, and equally there were a few that attracted
more support from investors than management. Only one area, namely
that related to the impact of share repurchase programmes on corporate
share price, generated views that were closely synchronised between
management and investors.
Reasons that attracted relatively more managerial support included
the capital reallocation explanation; the flexibility of share repurchase
programmes and their substitutability in relation to special dividends;

and signalling of undervaluation and future income. Assuming

comparability between the results, this gives rise to two key questions:
(i) does managerial action through share repurchase programmes attract
the intended investor reaction; and (ii) why do investors approve the
use of share repurchase programmes, if they have less confidence than
management in such programmes. Insights from the interviews indicate
a large diversity in investor views, whereby some organisations are very
supportive of share repurchase programmes while others are very sceptical
and believe that inertia may have set in. In other words, parts of the
investor community are likely to respond positively to share repurchase
programmes and also support their approval at AGMs (amidst careful
monitoring), while others respond less favourably, generating in aggregate
lower mean scores than those of enthusiastic managers. Moreover, the
educational role of current regulation that private investors particularly
alluded to, may also be responsible for the high level of approval rates
amongst this community.
include the use of share repurchases to generate publicity and as a
response to an emerging trend. Further, investors cited principal-agent
problems as important in two distinct contexts: first, the direct role
of share repurchase programmes in limiting principal-agent concerns;
and second, their role in exacerbating those concerns when managerial
reward structures are linked to movements in reported EPS levels.
Unsurprisingly, these views are not matched by those of management.
Finally in relation to existing regulation surrounding UK share
repurchase activity, investors, like management, believed that the
regulations served to improve the credibility of share repurchase
programmes and also provided an opportunity to develop investor
understanding. Views on whether such regulation curbed the usefulness
and benefits of share repurchase programmes were very diverse but one
sub-group favoured greater regulation, as exemplified by one interviewee
who called for more disclosures in which management accounted for
their actions post-event to express whether intended objectives had been
fulfilled or not.

7 Conclusions
Introduction
This report contributes to the literature on the use of share repurchase

programmes and seeks to explain the rise in repurchase activity in recent
years, both generally and more specifically in the UK. It employs, for
the first time in the UK, a survey based approach to examine the views
of: (i) managers from investment and non-investment companies; and
(ii) corporate investors in relation to the motivations underlying, and
regulation surrounding repurchase activity in the UK. Moreover, it
gathers views from non-repurchasing companies as well as repurchasing
companies. The key findings and implications of these findings, as well
as areas for future research, are reported below.
Motivations for share repurchases: non-investment

companies
Open market share repurchase programmes dominate the repurchase

activity of non-investment companies and the purchase arrangements
are generally financed by existing cash balances.
Returning excess cash flows to shareholders appears to dominate
corporate activity and this result perhaps serves to explain the subsequent
fall during the financial crisis characterised by a fall in profits and
a lack of credit. However, multiple motivations, drive repurchase
programmes in non-investment companies and this multiplicity extends
not only between companies but also within them. Additional factors
contributing to actual repurchases include: the influencing of reported
EPS levels; the signalling of undervaluation to capital markets; and the

optimising of companies gearing ratios. Somewhat surprisingly only

25% of companies engage in share repurchase programmes to increase
corporate share price, although this low percentage may be explained, in
part, by the companies overwhelming intention to simply return surplus
cash to investors and focus on financial management targets other than
the corporate share price per se.
Overall, these specific motivations identified by repurchasing
companies, are broadly in line with the generalist views cited by both
the repurchasing and non-repurchasing companies. There are, however,
a number of areas where some small differences emerged; for example,
although half of the sample companies generally agreed that signalling
undervaluation and conveying news about expectations of future
performance as well as the reallocation of capital in an efficient manner
drive share repurchase programmes, less than 25% of repurchasing
companies cited them as influencing their respective repurchases.
Similarly, while repurchases were seen in general as a substitute for special
(although not regular) dividends, only four repurchasing companies
cited dividend substitution as motivating their particular programmes.
There appears to be little difference between the views of managers
of repurchasing and non-repurchasing companies in relation to the
motivations underlying repurchases, generally. Specifically, 29 of the
35 statements included in this study generated statistically insignificant
differences between the views of managers of repurchasing companies
and non-repurchasing companies. These results suggest that differences
in perceptions between the two groups do not explain the decisions
to actually use a share repurchase programme. Indeed, a significant
and a rising proportion of non-repurchasing companies had sought
approval from investors (68% as at 2007) to engage in repurchase
activity. Rather, the lack of finance and adverse shareholder responses,
it appears, are responsible for the absence of repurchase enactments in
the non-repurchasing companies.

conclusions 107
Motivations for share repurchases: investment

companies
Investment companies also rely heavily on open market share

repurchases, although tender offers are used as well. Repurchases are
financed principally by the sale of investments.
The main factors contributing to the use of share repurchase
programmes among repurchasing investment companies appear to be
the management of Net Asset Value (NAV) per Share and the discount
to NAV, both of which are specific to investment companies. Managing
market liquidity is also important for investment companies, in contrast
to their non-investment company counterparts. The direct management
of share price is not a major driver for repurchasing investment
companies. Other reasons that receive little support include signalling
future performance, governance matters and capital structure.
Once again the specific points identified above are consistent with the
views expressed by both repurchasing and non-repurchasing investment
companies on the motivations underlying repurchases generally. Further,
the views of managers of repurchasing and non-repurchasing investment
companies are very similar, any differences generally relating to the
strength with which views are held; repurchasing companies typically
have stronger views. As with non-investment companies, these results
indicate that decisions to engage in or refrain from share repurchases
are not a result of differences in perceptions about such programmes
between repurchasing and non-repurchasing companies, but rather, the
absence of significant benefits from such programmes for the respective
companies and/or the costs associated with such activity. Just as the
value implications of repurchase programmes are more obvious with
investment companies than non-investment companies, the costs, it
would appear, are also more prominent, restricting their use in these
companies.
Overall, the results in relation to the management of the NAV and
discount to NAV are consistent with prior academic research, although

those in relation to the management of liquidity contradict those of

Porter et al. (1999) who examined US based close end funds.
Motivations for share repurchases: investors
Investors, it appears, adopt a more middle of the road approach

in their views about the motives underlying share repurchase
programmes than their corporate counterparts; they were less extreme
in supporting/refuting the motivations that were presented to them in
the questionnaire. A number of motivations attracted more managerial
support than investor support, and equally there were a few that attracted
more investor support than managerial support. Only one area generated
closely synchronised views between management and investors, that
relating to the impact of share repurchase programmes on corporate
share price. Both groups marginally supported the view that share
repurchase programmes increase share price and acknowledged the role
of repurchase announcements in so doing, but believed that changes
to company value, if any, were likely to be gradual, taking place over a
long-term period.
Reasons that attracted relatively more managerial support included:
capital reallocation in which surplus funds are returned to investors in
the absence of value enhancing projects; the flexibility of share repurchase
programmes and their substitutability in relation to special dividends;
the role of share repurchase programmes in influencing corporate gearing
levels; and signalling in relation to both the current undervaluation of
a company and its future income.
included: share repurchase announcements enabling companies to
generate publicity in the markets; and that repurchase programmes may
be an emerging trend. Moreover, investors provided more support for
the agency view of share repurchase programmes, although they also
identified share repurchase programmes as exaggerating such principal-
agent concerns when managerial reward structures were linked to market
movements in EPS levels.

conclusions 109
Two key related questions that arise as a result of these differences

are whether: (i) managerial action through share repurchase programmes
attracts the intended investor reaction; and (ii) investors approve the use
of share repurchase programmes by companies for the same reasons that
managers intend to use them. Insights from the interviews suggest that
the high approval rates by shareholders may be as a result of inertia and
the passive involvement of shareholders.
Reflections into the role of existing UK repurchase

regulation
Investors and corporate managers, alike believe that the current

regulations under which share repurchase programmes in the UK
are undertaken add credibility to such programmes; investors and
investment company managers also suggest that the regulations provide
an opportunity to educate shareholders. Focusing on specific parts
of the specific regulatory framework, sub-groups of both investment
companies and non-investment companies report that the listing
requirements surrounding the volume, pricing and/or timing of
repurchase programmes restrict the usefulness and value of share
repurchase programmes. Indeed, this view is shared by a proportion
of the investors. For all three stakeholder groups, however, this view
is not universal. In relation to regulation concerning the reporting
requirements to the FSA and the opportunity to hold shares in treasury,
neither managers (from both investment companies and non-investment
companies) nor investors consider such regulation to be restrictive.
Addressing shareholder involvement in the approval process of
share repurchase programmes, financial managers broadly believe that
this requirement does not curb corporate activity. At the same time
investors, on average, appear to believe that they are playing a relevant
role and their current level of involvement is valuable. A small group
nevertheless believe that share repurchase activity has spiralled out of
control and that more regulation is required to protect shareholder
wealth; unsurprisingly this view is not shared by corporate managers.

International comparison
Motivations behind the use of share repurchase programmes in the

UK, it appears, differ from those in the US and Australia. UK companies
are more constrained in their views on the role of share repurchase
programmes in influencing EPS levels, correcting undervaluation and
influencing corporate share price, motives which dominate Australian
and US companies programmes (Mitchell et al., 2001 and Baker et al.,
2003). These differences in results may, in part, stem from the time
periods when the various surveys of each country were conducted and
the different circumstances and situations faced by the companies being
surveyed; all of these may increase or reduce the relevance of specific
drivers. For example, the recent developments in the area of corporate
governance may be responsible for encouraging companies to pay back
surplus cash to investors.
In addition, the more stringent operational conditions of the
UK, enforced through regulations stipulated by the UKLA and the
Companies Act, may also be responsible for variations in findings
across companies. The volume and timing restrictions stipulated by
the UKLA rules may limit the opportunities for companies to signal
undervaluation and influence corporate share price. As such the UK
results indicate that current regulation seems to achieve its aims; UK
managers general satisfaction with this regulation and the absence of
any regrets about opportunities to repurchase shares is not considered
an obstacle to corporate financial management practices.
Policy implications
The policy implications arising from this study are:
Managers and more importantly, non-executives with their fiduciary

responsibilities, need to carefully assess recommendations from
bankers and advisors in relation to share repurchase programmes

conclusions 111
because, as highlighted in the investor survey, they stand to gain

from such programmes and thus their advice may lack objectivity.
When managers use share repurchase programmes to capitalise

on those characteristics which distinguish them from other
distribution methods, they should emphasise the particular benefits
such programmes generate which are, or may not be, provided by
alternative distribution networks. A more extreme version of this, as
suggested by the UKSA and supported by one of the interviewees in
the study, is that regulation that requires companies to justify their
use of share repurchase programmes over alternative distribution
methods should be put in place.
In addition, as suggested by one of the interviewees, to demonstrate

good practice, management might report on the outcome of share
repurchase transactions post-event to demonstrate the value of such
programmes for investors. The UKSA once again holds a more
stringent view and believes that regulation should be put in place
to enforce such practice.
Finally, from a shareholder perspective, while investors seek to

discount the impact of share repurchase programmes on EPS levels
to determine the true level, managers may nevertheless be inclined
to attempt to manipulate this ratio if their reward structures are
tied to it. Indeed, as seen in the investor survey, managers are seen
to be significant beneficiaries of such programmes and thus, where
appropriate, investors should campaign for a change in such reward
structures.
Limitations and areas for future research
While the survey generated sound response levels from the investment
companies and non-investment companies, those from corporate
investors, particularly institutional investors were disappointing; this

disappointment also extended to the participation of investors in the

interviews. Results relating to the views from institutional investors
should therefore be treated with caution, particularly in the context of
the interviews, where the views may not be representative of the general
population.
Nevertheless, the more detailed insights from the interviewees
highlight the benefits of interviews in this area of financial management,
and more generally. Therefore future research may seek to gather more
detailed views from investors as well as corporate managers, who will
also have their own perspectives on the subject area. Moreover, new
research can shed light on why the pattern of growth in share repurchase
programmes has reversed during the recent financial global crisis, and
what investors and managers expect the future to hold. Finally, future,
capital markets based research may seek to examine the effects of the
specific volumes of activity by individual companies and the timing of
repurchase programmes on share price responses to such news; these
were cited as being of relevance by the interviewees.
Summary
This report examines UK investment companies and non-

investment companies reasons for employing share repurchase
programmes and shareholders views of such programmes. Results
of the research indicate that only a select sample of reasons appear to
drive repurchase activity in the UK and that the reasons differ between
investment companies and non-investment companies reflecting the
differences in their operating characteristics. In addition, regulation in
the UK appears to shape repurchase activity, although it is not seen to
restrain corporate activity, and both managers and investors are broadly
content with it. Nevertheless there is room for additional reporting
guidelines and the differences in the views of corporate managers and
investors also need to be addressed.

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A ppendix 1
Views of financial managers of non-investment companies

Table A Motivations underlying the use of share repurchase programmes:
The general views of respondents
(n = 97) (n = 66) (n = 31)
Dis- Dis- Dis-
Statements Agree agree Mean Agree agree Mean Agree agree Mean
Repurchase programmes and share
prices % % % % % %
10. Share repurchases increase 39 27 +3.13 38 26 +3.14 41 28 +3.10
company share price.
11. Share prices respond immediately 18 57 2.57 14 61 2.50 28 48 +2.72
to a share repurchase.
12. Share prices respond gradually, 51 25 3.23 63 19 3.41 24 38 +2.83
over a longer period, to a share
repurchase.***
13. Announcements of intentions to 42 26 3.18 40 29 +3.12 45 17 3.31
repurchase shares lead to share
price rises.
Repurchases versus dividends % % % % % %
1. Share repurchases are a substitute 3 91 1.71 3 91 1.76 3 90 1.60
for regular dividend payments.
2. Share repurchases are a substitute 10 79 2.08 14 77 2.17 3 83 1.90
for increases in regular dividend
payments.
3. Share repurchases are a substitute 67 20 3.59 74 18 3.73 50 23 +3.30
for special dividend payments.**
4. Share repurchases offer a flexible 85 6 4.05 91 6 4.20 73 7 3.73
means to return surplus cash to
shareholders.***
Signalling undervaluation/future
performance % % % % % %
5. Share repurchases signal to the 51 27 3.34 50 29 3.30 53 23 3.43
markets that the companys shares
are intrinsically undervalued.
6. Share repurchases signal 63 21 3.48 65 15 3.56 57 33 3.30
managements confidence in future
earnings/share prices.
7. Share repurchases signal a 11 58 2.44 12 56 2.48 10 63 2.33
permanent improvement in
corporate earnings.
8. Share repurchases signal a 18 52 2.56 20 52 2.62 13 53 2.43
temporary improvement in
corporate earnings.
9. Share repurchase announcements 42 28 +3.09 38 31 +3.00 54 21 +3.29
enable the company to gain
publicity in the markets.

118 Appendix 1

The general views of respondents (Cont.)

(n = 97) (n = 66) (n = 31)
Dis- Dis- Dis-
Capital structure and investment
decisions % % % % % %
15. Share repurchase decisions are 76 6 3.86 76 6 3.86 76 7 3.86
made after capital structure
decisions have been reached.
16. Share repurchase decisions 85 2 3.98 88 2 3.98 79 3 3.97

are made after investment
decisions have been reached.
14. Share repurchases are used to 56 29 3.35 57 28 3.35 55 31 3.34

increase the companys gearing
(debt to equity) ratio.
Managing principal-agent % % % % % %
problems
19. Share repurchases ensure 40 29 +3.15 44 21 3.26 31 45 +2.90

that surplus cash is returned
to shareholders and thus
overcome the perception
that funds may otherwise be
misused internally.*
Efficient capital reallocation % % % % % %
4. Share repurchases offer a 85 6 4.05 91 6 4.20 73 7 3.73

flexible means to return surplus
cash to shareholders.
17. In the absence of corporate 95 2 4.15 94 3 4.15 97 0 4.14

value enhancing investment
opportunities, share
repurchases enable companies
to return the wealth to
their shareholders, who can
themselves re-invest it in value
enhancing investments.
18. Shares are repurchased when 67 16 3.64 68 18 3.64 66 10 3.66

they offer a better investment
opportunity relative to
alternative investment
opportunities.

Appendix 1 119


(n = 97) (n = 66) (n = 31)
Dis- Dis- Dis-
Stakeholder expectations % % % % % %
26. Shareholder views/ 83 7 3.95 76 11 3.80 100 0 4.28
requirements are an important
consideration when reaching
share repurchase decisions.***
27. The beneficiaries of share
repurchase programmes are:
i. Institutional investors 82 4 3.94 85 5 3.95 76 3 3.90
ii. Private investors 81 5 3.87 83 6 3.88 76 3 3.86
iii. Management 30 24 +3.05 35 22 +3.13 21 28 +2.90
iv. Employees 21 29 +2.85 25 29 +2.92 10 31 2.69
v. Bankers and advisors 47 20 3.30 49 21 3.30 41 17 3.31
vi. Sellers in repurchase 41 14 3.29 39 19 3.23 46 4 3.43
programmes
vii. Non-sellers in repurchase 42 8 3.38 47 9 3.42 32 4 3.29
programmes
Improving reported financial
increase company EPS.
Reissue considerations % % % % % %
21. Share repurchases are used to 40 32 +3.05 47 29 +3.21 31 35 +2.86
generate shares for re-issue
(e.g. to fulfil employee stock
options or SCRIP dividends
for investors).
Managing takeover threats % % % % % %
28. Share repurchases are a useful 24 52 2.58 24 52 2.55 25 50 2.64
tool to protect against a
potential takeover.

120 Appendix 1
Table A Motivations underlying the use of share repurchase

programmes: The general views of respondents (Cont.)

(n = 97) (n = 66) (n = 31)
Dis- Dis- Dis-

Other reasons for share

repurchases % % % % % %
25. Share repurchases are 20 36 2.82 19 35 +2.83 24 38 +2.79

on the rise because they
are fashionable.
24. Share repurchases help 15 61 2.45 15 61 2.47 14 62 2.41

to improve the market
liquidity of a firms
shares.
23. Share repurchases are 15 34 2.79 9 33 2.74 28 34 +2.90

more appropriate in
falling markets than in
rising markets.
22. Share repurchases are 40 38 +3.01 36 46 +2.89 48 21 +3.28

used to improve future
dividend per share
(DPS) or reduce the
companys commitment
to total future dividend
payments by reducing
the number of shares
outstanding.*
Notes: This table reports the respondents views in relation to the use of share repurchase
programmes for the total sample. The results tabulated include the percentage agreement
and disagreement levels and the mean scores based on a five point Likert scale where 1
is equivalent to strongly disagree, 5, strongly agree and 3, no opinion. The numbering
by the statements indicates the order in which they appeared in the questionnaire.
+ indicates a mean score statistically insignificant from the value of 3 (no opinion).
*/**/*** indicates a significant difference at the 10%, 5% and 1% levels, respectively
between the views of repurchasing and non-repurchasing companies.

Appendix 1 121
Table B Respondent perceptions in relation to regulation surrounding

repurchase activity in the UK

(n = 97) (n = 66) (n = 31)
Dis- Dis- Dis-

Agree agree Mean Agree agree Mean Agree agree Mean
Statements % % % % % %
2. The stringent regulations under 66 15 3.54 67 17 3.53 66 10 3.55

which repurchase programmes
are undertaken gives such
activity more credibility than if
undertaken in the absence of such
regulation.
1. The requirement to seek 44 28 +3.13 39 29 +3.05 55 24 3.31

shareholder approval enables
companies to educate shareholders
about the usefulness of repurchase
programmes.
3a. Regulation surrounding the 33 36 +3.01 33 38 +2.98 31 31 +3.07

volume, pricing and/or timing
of open market repurchases as
stipulated by the listing rules
restricts the use and value of open
market repurchase programmes.
3b. Administrative burden of 5 65 2.33 5 67 2.27 7 62 2.45

reporting repurchase activity to
the FSA and in annual reports
market repurchase programmes.
3c. Regulation surrounding the 8 53 2.49 9 53 2.47 7 52 2.55

intention to hold the shares
as treasury shares restricts the
use and value of open market
repurchase programmes.
3d. Regulation to seek regular 19 51 2.65 15 56 2.53 28 38 +2.93

approval from shareholders to
engage in repurchase activity
market repurchase programmes.**

122 Appendix 1
Table B Motivations underlying the use of share repurchase

programmes: the general views of respondents (Cont.)

(n = 97) (n = 66) (n = 31)
Dis- Dis- Dis-

3e. The motives of repurchases 14 42 2.67 8 44 2.58 28 38 +2.90

agreed with shareholders
at approval restrict the use
and value of open market
3f. The volume and pricing 19 36 2.80 12 39 2.70 31 28 +3.03

conditions of repurchases
repurchases.*
4. Regulation surrounding 2 77 2.06 3 79 1.98 0 72 2.24

repurchase activity has had
little impact and therefore
repurchase programmes have
spiralled out of control.*

repurchase activity has not
fully protected shareholders
and further regulation (such
as companies justifying
their use of repurchase
programmes over other
income distribution strategies)
is therefore required.
and disagreement levels and the mean scores based on a five point Likert scale where 1
is equivalent to strongly disagree, 5, strongly agree and 3, no opinion. The numbering
by the statements indicates the order in which they appeared in the questionnaire.

A ppendix 2
Views of financial managers of investment companies

The general views of respondents

(n = 53) (n = 32) (n = 21)
Dis- Dis- Dis-

Share repurchases and company

share prices % % % % % %
2. Share repurchases increase 50 26 3.29 50 32 +3.23 50 20 3.35

company share price.
3. Share prices respond 20 51 2.63 10 62 2.43 30 40 +2.85

immediately to a share
repurchase.

gradually, over a longer
period, to a share
repurchase.***
1. Announcements of intentions 34 32 +2.98 38 43 +2.81 30 20 +3.15

to repurchase shares lead to
share price rises.
Net Asset Value and discount

management % % % % % %
5. Share repurchases enhance net 93 2 4.36 100 0 4.57 86 5 4.14

asset value (NAV) per share.*
6. Share repurchases reduce the 49 22 3.34 67 19 3.52 30 25 +3.15

discount to NAV.
7. Share repurchases reduce the 55 33 3.29 68 23 3.45 40 45 +3.10

volatility of the discount to
NAV.

124 Appendix 2


(n = 53) (n = 32) (n = 21)
Dis- Dis- Dis-

Signalling future performance

and corporate governance % % % % % %
9. Share repurchase are a response 15 76 2.17 10 81 1.86 20 70 2.50

to poor past performance.**
10. Share repurchases signal 5 76 2.05 5 81 1.95 5 70 2.15

improved future performance.
11. Share repurchases signal a lack 19 66 2.34 10 76 2.00 30 55 +2.70

of future growth opportunities
for the company.*
8. Share repurchase 32 34 +2.93 33 38 +2.86 30 30 +3.00

announcements enable the
company to gain publicity in
the markets.
17. Share repurchases signal 24 42 2.73 24 43 +2.71 25 40 +2.75

improved corporate
governance through increased
director oversight of the fund
manager(s).
18. Share repurchases signal 24 44 2.71 19 48 2.62 30 40 +2.80

improved corporate
governance through increased
director independence from
the fund manager(s).
Market liquidity and reissue

consideration % % % % % %
13. Share repurchases help to 56 24 3.44 62 29 3.48 50 20 +3.40

improve the market liquidity
of a firms shares.
14. Share repurchases enable 73 8 3.75 70 10 3.65 75 5 3.85

companies to better manage
supply and demand for their
shares.

generate shares for re-issue.
Capital structure % % % % % %

increase the companys gearing
(debt to equity) ratio.*

Appendix 2 125


(n = 53) (n = 32) (n = 21)
Dis- Dis- Dis-

12. Shares are repurchased when 39 39 +2.85 38 43 +2.81 40 35 +2.90

opportunity relative to alternative
investment opportunities.
21. Shareholder views/requirements 93 0 4.18 90 0 4.20 95 0 4.15

are an important consideration
when reaching share repurchase
decisions.


ii. Private investors 83 8 3.90 81 5 3.90 84 11 3.89
iii. Management 15 67 2.33 10 65 2.35 21 69 2.32
iv. Brokers and advisors 55 20 3.30 52 14 3.38 58 26 +3.21
v. Sellers in repurchase programmes 75 8 3.78 80 5 3.80 70 10 3.75
vi. Non-sellers in repurchase 56 23 3.41 60 20 3.45 53 26 +3.37
programmes
Other reasons for share repurchases % % % % % %
20. Share repurchases are on the rise 12 63 2.41 5 62 2.29 20 65 2.55

because they are fashionable.
19. Share repurchases are more 15 59 2.44 19 48 2.57 10 70 2.30

appropriate in falling markets
than in rising markets.
and disagreement levels and the mean scores based on a five point Likert scale where 1 is
equivalent to strongly disagree, 5, strongly agree and 3, no opinion. The numbering by the
statements indicates the order in which they appeared in the questionnaire.
*/**/*** indicates a significant difference at the 10%, 5% and 1% levels, respectively between
the views of repurchasing and non-repurchasing companies.

126 Appendix 2


(n = 53) (n = 32) (n = 21)
Dis- Dis- Dis-

2. The stringent regulations 68 16 3.61 63 16 3.47 74 16 3.74

under which repurchase
programmes are undertaken
gives such activity more
credibility than if undertaken
in the absence of such
regulation.
1. The requirement to seek 53 18 3.29 47 21 +3.26 58 16 +3.32

companies to educate
shareholders about the
usefulness of repurchase
programmes.
3a. Regulation surrounding 35 41 +2.97 47 42 +3.05 22 39 +2.89

the volume, pricing and/
or timing of open market
repurchases as stipulated by
the listing rules restricts the
3b. Administrative burden of 14 70 2.41 11 63 2.37 17 78 2.44

reporting repurchase activity
to the FSA and in annual
reports restricts the use
3c. Regulation surrounding the 24 43 +2.81 26 42 +2.79 22 44 +2.83

3d. Regulation to seek regular 24 65 2.51 21 68 2.47 28 61 +2.56

approval from shareholders
to engage in repurchase
activity restricts the use

Appendix 2 127

repurchase activity in the UK (Cont.)

(n = 53) (n = 32) (n = 21)
Dis- Dis- Dis-

3e. The motives of repurchases 21 45 +2.76 25 30 +3.00 17 61 2.50

repurchase programmes.*
3f. The volume and pricing 30 41 +2.86 26 42 +2.84 33 39 +2.89

repurchases.

repurchase activity has had
little impact and therefore
repurchase programmes have
spiralled out of control.

repurchase activity has not
fully protected shareholders
and further regulation (such
as companies justifying
income distribution
strategies) is therefore
required.
programmes for the total sample. The results tabulated include the percentage agreement and
disagreement levels and the mean scores based on a five point Likert scale where 1 is equivalent
to strongly disagree, 5, strongly agree and 3, no opinion. The numbering by the statements
indicates the order in which they appeared in the questionnaire.
*/**/*** indicates a significant difference at the 10%, 5% and 1% levels, respectively between
the views of repurchasing and non-repurchasing companies.

A ppendix 3
Views of investors

the general views of respondents
All investors Private investors Institutional investors

(n = 57) (n = 39) (n = 18)
Dis- Dis- Dis-

Repurchase programmes and

share prices % % % % % %
10. Share repurchases increase 41 26 +3.17 47 19 3.36 28 39 +2.78

company share price.*
11. Share prices respond 30 35 +2.94 25 33 +2.97 39 39 +2.89

immediately to a share
repurchase.

gradually, over a longer
period, to a share
repurchase.
13. Announcements of 48 30 +3.19 53 31 3.28 39 28 +3.00

intentions to repurchase
shares lead to share price
rises.
Repurchases vs dividends % % % % % %
1. Share repurchases are 25 60 2.45 34 49 +2.83 6 83 1.72

a substitute for regular
dividend payments.***
2. Share repurchases are a 35 54 +2.74 42 42 +3.03 22 78 2.17

substitute for increases
in regular dividend
payments.**

a substitute for special
dividend payments.
4. Share repurchases offer a 61 20 3.43 53 25 +3.28 78 11 3.72

flexible means to return
surplus cash to shareholders.

130 Appendix 3

the general views of respondents (Cont.)

(n = 57) (n = 39) (n = 18)
Dis- Dis- Dis-

Signalling undervaluation/
future performance % % % % % %
5. Share repurchases signal 47 19 3.32 43 23 +3.23 56 11 3.50

to the markets that the
companys shares are
intrinsically undervalued.
6. Share repurchases signal 52 19 3.43 58 8 3.64 39 39 +3.00

managements confidence
in future earnings/share
prices.**
7. Share repurchases signal a 17 51 2.51 23 40 +2.74 6 72 2.06

permanent improvement
in corporate earnings.**
8. Share repurchases signal a 33 28 +3.07 36 25 +3.14 28 33 +2.94

temporary improvement
in corporate earnings.
9. Share repurchase 57 17 3.48 58 14 3.56 56 22 +3.33

announcements enable
the company to gain
publicity in the markets.
Capital structure and

investment decisions % % % % % %
15. Share repurchase 49 11 3.49 40 11 3.37 67 11 3.72

decisions are made after
capital structure decisions
have been reached.*
16. Share repurchase 63 9 3.54 61 11 3.47 67 6 3.67

decisions are made after
investment decisions have
been reached.

used to increase the
companys gearing (debt
to equity) ratio.
Managing principal-agent
problems % % % % % %
19. Share repurchases ensure 60 9 3.62 46 11 3.49 89 6 3.89

that surplus cash is
returned to shareholders
and thus overcome the
perception that funds
may otherwise be misused
internally.**

Appendix 3 131

the general views of respondents (Cont.)

(n = 57) (n = 39) (n = 18)
Dis- Dis- Dis-

4. Share repurchases offer a 61 20 3.43 53 25 3.28 78 11 3.72

flexible means to return
surplus cash to shareholders.
17. In the absence of 59 24 3.48 50 25 3.31 78 22 3.83

corporate value enhancing
investment opportunities,
share repurchases enable
companies to return the
wealth to their shareholders,
who can themselves re-invest
it in value enhancing
investments.**
18. Shares are repurchased when 50 24 3.31 44 22 3.22

+
61 28 +
3.50
opportunity relative to
alternative investment
opportunities.
26. Shareholder views/ 65 19 3.65 53 23 3.43 83 11 4.00

requirements are an
important consideration
when reaching share
repurchase decisions.*


ii. Private investors 52 23 3.27 50 24 +
3.26 56 22 +
3.28
iii. Management* 65 8 3.69 59 12 3.53 78 0 4.00
iv. Employees 34 23 +
3.04 34 26 +
3.00 33 17 +
3.11
v. Bankers and advisors 62 11 3.68 54 17 3.54 78 0 3.94
vi. Sellers in repurchase 62 8 3.70 60 6 3.77 67 11 3.56
programmes
vii. Non-sellers in repurchase 28 21 +
3.06 20 17 3.06
+
44 28 +
3.06
programmes
Improving reported financial

20. Share repurchases are used to 54 26 3.33 50 28 3.31

+
61 22 +
3.39
increase company EPS.

132 Appendix 3
Table A Motivations underlying the use of share repurchase

programmes: the general views of respondents (Cont.)

(n = 57) (n = 39) (n = 18)
Dis- Agree Dis- Dis-
Statements Agree agree Mean agree Mean Agree agree Mean
Re-issue considerations % % % % % %

used to generate shares
for re-issue (e.g. to fulfil
employee stock options
or SCRIP dividends for
investors).
Managing takeover threats % % % % % %

a useful tool to protect
against a potential
takeover.***
Other reasons for share % % % % % %

repurchases
25. Share repurchases are on 41 22 3.24 42 19 3.28 39 28 +3.17

the rise because they are
fashionable.
24. Share repurchases help 37 32 +3.04 45 17 3.31 22 61 2.50

to improve the market
liquidity of a firms
shares.***

more appropriate in falling
markets than in rising
markets.

used to improve future
dividend per share (DPS)
or reduce the companys
commitment to total
future dividend payments
by reducing the number of
shares outstanding.**
equivalent to strongly disagree, 5, strongly agree and 3, no opinion. The numbering by
the statements indicates the order in which they appeared in the questionnaire.

Appendix 3 133


(n = 57) (n = 39) (n = 18)
Dis- Dis- Dis-

2. The stringent regulations 67 9 3.63 72 8 3.75 56 11 +3.39

under which repurchase
programmes are undertaken
gives such activity more
credibility than if undertaken
in the absence of such
regulation.
1. The requirement to seek 67 22 3.56 72 17 3.75 56 33 +3.17

companies to educate
shareholders about the
usefulness of repurchase
programmes.**
3a. Regulation surrounding 30 25 +3.06 26 20 +3.09 39 33 +3.00

the volume, pricing and/
or timing of open market
repurchases as stipulated by
the listing rules restricts the
3b. Administrative burden of 19 39 +2.83 24 29 +2.97 11 56 2.56

reporting repurchase activity
to the FSA and in annual
reports restricts the use
repurchase programmes.*
3c. Regulation surrounding the 17 25 +2.94 17 23 +2.97 16 28 +2.89

3d. Regulation to seek regular 43 34 +3.19 54 26 3.40 22 50 +2.78

approval from shareholders to
engage in repurchase activity
restricts the use and value
of open market repurchase
programmes.**

134 Appendix 3

repurchase activity in the UK (Cont.)

(n = 57) (n = 39) (n = 18)
Dis- Dis- Dis-

3e. The motives of 40 25 3.21 47 21 3.32 28 33 +3.00

repurchases agreed with
shareholders at approval
restrict the use and
value of open market
3f. The volume and pricing 40 25 +3.15 35 21 +3.18 50 33 +3.11

at approval restrict the
use and value of open
market repurchases.
4. Regulation surrounding 35 24 +3.09 39 25 +3.17 28 22 +2.94

repurchase activity has
had little impact and
therefore repurchase
programmes have
spiralled out of control.
5. Regulation surrounding 38 30 +3.13 43 29 +3.26 28 33 +2.89

repurchase activity has
not fully protected
shareholders and further
regulation (such as
companies justifying
income distribution
strategies) is therefore
required.
equivalent to strongly disagree, 5, strongly agree and 3, no opinion. The numbering by
the statements indicates the order in which they appeared in the questionnaire.

A bout the Authors
Alpa Dhanani is Senior Lecturer in Accounting and Finance at Cardiff

Business School, where she also completed her PhD studies. Alpas
research interests lie in the field of corporate financial management.
She teaches finance primarily to second and third year undergraduate
students, but has also taught on accounting based modules and a research
methods module at the postgraduate level.
Roydon Roberts is Lecturer in Accounting and Finance at Cardiff

Business School. He is also a fellow of the Institute of Chartered
Accountants in England and Wales. Roydons research interests lie
principally in the field of corporate financial management and audit fee
determinants. He teaches final year undergraduates on specialist finance
modules and Financial Management to MBA students.

Corporate Share Repurchases: The Perceptions and Practices of UK Financial Managers & Corporate Investors
Corporate Share Repurchases: The Perceptions
and Practices of UK Financial Managers and
Corporate Investors
the moment it is difficult to see when and if share repurchase activity will
increase and what the repercussions will be for companies who have bought
back their shares in recent years.
This research study, which started before the credit crunch, investigates
Corporate Share Repurchases:
the motivations for share repurchases and the perceptions of their use by
both the corporate and investor community. The findings of this research
The Perceptions and Practices
may act as a useful guide in this new uncertain future as to whether share
repurchases will continue to be used and, if so, in what circumstances and
of UK Financial Managers and
by which companies.
Corporate Investors
The study uses a survey approach to obtain the views of managers of
investment and non-investment companies and the investor community. Researchers: Alpa Dhanani
Perceptions on the motivations for share repurchase activity are compared Roydon Roberts
and contrasted as well as reflections on the role of regulation. The report
concludes with four policy implications for managers and investors to
consider.
ISBN 978-1 904574-545

EAN 9781904574545
CA HOUSE 21 HAYMARKET YARDS EDINBURGH EH12 5BH

TEL: 0131 347 0237 FAX: 0131 347 0114
EMAIL: research@icas.org.uk WEB: www.icas.org.uk/research
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Corporate Share Repurchases ICAS

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Corporate Share Repurchases: The Perceptions and Practices of UK Financial Managers & Corporate Investors

Corporate Share Repurchases: The Perceptions

ISBN 978-1 904574-545

CA HOUSE 21 HAYMARKET YARDS EDINBURGH EH12 5BH

Dhanani Covers - Oct 09.indd 1 16/11/2009 16:34

The Institute of Chartered Accountants of Scotland

Dhanani Report - 2009.indd 1 12/11/2009 13:46:08

This book is published for the Research Committee of

No responsibility for loss occasioned to any person acting

All rights reserved. No part of this publication may be

Printed and bound in Great Britain

Dhanani Report - 2009.indd 2 12/11/2009 13:46:08

List of Abbreviations ..................................................................... i

2. Literature Review .................................................................. 13

3. Research Methods ................................................................. 35

Dhanani Report - 2009.indd 3 12/11/2009 13:46:08

4. Financial Managers of Non-Investment Companies ................ 45

5. Financial Managers of Investment Companies ......................... 67

6. The Views of Investors ............................................................ 83

Dhanani Report - 2009.indd 4 12/11/2009 13:46:09

7. Conclusions ............................................................................ 105

References ...................................................................................... 113

Appendix 1 Views of financial managers of non-investment

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AIM Alternative Investment Market

Dhanani Report - 2009.indd 7 12/11/2009 13:46:09

Dhanani Report - 2009.indd 9 12/11/2009 13:46:09

This project was funded by the Scottish Accountancy Trust for

Dhanani Report - 2009.indd 4 12/11/2009 13:46:09

The authors wish to express their gratitude to all the participants in

Dhanani Report - 2009.indd 5 12/11/2009 13:46:09

Share repurchase activity became a global phenomenon in the late

Dhanani Report - 2009.indd 7 12/11/2009 13:46:09

Notwithstanding the reversal in growth, share repurchases continue

substituting for regular or special dividends;

Prior empirical research has presented mixed and ambiguous results

Dhanani Report - 2009.indd 8 12/11/2009 13:46:09

In this context, using a survey approach, this report seeks to examine

captures the views of managers of both repurchasing and non-

The results of the survey, based on usable responses from an

Dhanani Report - 2009.indd 9 12/11/2009 13:46:09

Motivations underlying the use of share repurchases:

Open market share repurchase programmes, generally financed

Dhanani Report - 2009.indd 10 12/11/2009 13:46:10

dividends only four repurchasers cited dividend substitution as

Motivations underlying the use of share repurchases:

Investment companies also rely heavily on open market share

Dhanani Report - 2009.indd 11 12/11/2009 13:46:10

more strongly with statements that were unfavoured. As with non-

Motivations underlying the use of share repurchases:

Comparing investor views with those of managers, a number of

Dhanani Report - 2009.indd 12 12/11/2009 13:46:10

the capital markets. Moreover, investors provided more support for

Perceptions in relation to regulation surrounding

Investors and corporate managers alike believe that the current

Dhanani Report - 2009.indd 13 12/11/2009 13:46:10

Addressing shareholder involvement in the approval process for

On comparing the motivations that influence repurchase activity in

Dhanani Report - 2009.indd 14 12/11/2009 13:46:10

The policy implications arising from this study are:

Managers and more importantly, non-executives with their fiduciary

When managers use share repurchase programmes to capitalise

In addition, as suggested by one of the interviewees, to demonstrate

Finally, from a shareholder perspective, while investors seek to