654  Capital Structure, Dividends, and Share Repurchases
Share Repurchases
In the early 1980s, share repurchases represented less than 10 percent of cash 
payouts to shareholders. Since then, they have gained notable importance 
as an alternative way to distribute cash to shareholders, mainly because key 
regulatory limits for corporations to purchase their own shares were removed 
in the United States in 1982.34 By 1999, for example, share repurchases totaled 
$181 billion, close to the $216 billion in regular dividend payments for compa-
nies listed on the New York Stock Exchange.35 Even in the wake of the stock 
market downturn in 2000, major companies in different sectors have contin-
ued to repurchase shares on a large scale; examples include ExxonMobil, IBM, 
Marks & Spencer, Shell, Unilever, and Viacom. In 2018, about 60 percent of 
cash distributions to shareholders in the United States were share repurchases.
Investors typically interpret share repurchases positively, for several rea-
sons. First, a share buyback shows that managers are confident that future cash 
flows are strong enough to support future investments and debt commitments. 
Second, it signals that the company will not spend its excess cash on value-
destroying investments. Third, buying back shares indicates to investors that 
management believes the company’s shares are undervalued. If management 
itself buys back shares, this effect is reinforced. Research shows that because of 
this signaling, share prices historically increased 2 to 3 percent on average on 
the day of announcement for smaller repurchase programs (in which less than 
10 percent of shares outstanding were acquired through open-market transac-
tions).36 However, these results were mostly driven by share price increases 
for smaller companies. In addition, repurchases have become a regular payout 
instrument, so that their signaling effect has declined over the years.
These signaling effects should not be confused with value creation for 
shareholders, as they only reflect higher market expectations of future per-
formance. If the company does not deliver against these higher expectations, 
the share price will come down again. As is the case for all cash payouts to 
shareholders, repurchases do not create value for shareholders, because they 
do not increase the company’s cash flows from operations. This is confirmed 
by empirical evidence that earnings multiples are not related to the amount 
or the form of the cash returns, whether in dividends or via share buybacks 
(see Exhibit 33.12).37
34 Following Rule 10b-18 of the U.S. Securities and Exchange Commission.
35 See Pettit, “Is a Share Buyback Right for Your Company?”
36 In smaller programs, companies typically buy their own shares at no premium or a limited premium 
in so-called open-market purchases. Larger programs are often organized in the form of tender offers 
in which companies announce that they will repurchase a particular number of shares at a signifi-
cant premium. See, for example, R. Comment and J. Jarrell, “The Relative Signaling Power of Dutch- 
Auction and Fixed Price Self-Tender Offers and Open-Market Repurchases,” Journal of Finance 46, no. 4 
(1991): 1243–1272; and T. Vermaelen, “Common Stock Repurchases and Market Signaling: An Empiri-
cal Study,” Journal of Financial Economics 9, no. 2 (1981): 138–183.
37 See B. Jiang and T. Koller, “Paying Back Your Shareholders,” McKinsey on Finance, no. 39 (2011): 2–7.