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Journal of Corporate Finance 17 (2011) 13061329

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Journal of Corporate Finance


j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / j c o r p f i n

Cash holdings and share repurchases: International evidence


Bong Soo Lee a, 1, Jungwon Suh b,
a
b

Department of Finance, College of Business, Florida State University, Tallahassee, Florida, United States
Department of Finance, College of Business Administration, Ewha Womans University, 11-1 Daehyun-dong, Seodaemun-gu, Seoul, 120-750, Republic of Korea

a r t i c l e

i n f o

Article history:
Received 10 July 2010
Received in revised form 16 June 2011
Accepted 17 June 2011
Available online 2 July 2011
JEL classication:
G35
G15

Keywords:
Share repurchases
Cash holdings
Free cash ow
Temporary cash ow

a b s t r a c t
In this study, we examine the patterns and determinants of share repurchases using firm-level
data from seven major countriesAustralia, Canada, France, Germany, Japan, the U.K., and the
U.S.over the period 19982006. We find that while non-U.S. firms do not repurchase shares as
much as U.S. firms do, both U.S. and non-U.S. firms display a common set of share repurchase
behaviors. For example, across countries, firms use share repurchases as a flexible means of
distributing cash. More importantly, large cash holdings are significantly associated with the
amount of share repurchases in all countries. There is evidence that large cash holdings held by
repurchasing firms represent excess cash. Firms tend to experience substantial increases in
cash holdings prior to share repurchase as a result of reductions in capital expenditures.
Overall, our evidence lends support to two hypotheses: (i) firms discharge excess capital to
reduce agency conflicts and (ii) firms use repurchases to distribute temporary cash flows.
2011 Elsevier B.V. All rights reserved.

1. Introduction
Both the nancial press and academic studies report that share repurchases have replaced dividends as the most important
payout method in the U.S. For example, Grullon and Michaely (2002) report that the total value of share repurchases exceeds that
of dividends in 1998. Prior research for U.S. rms documents that share repurchases are a exible means of distributing cash and
that they are associated with temporary income (e.g., Grullon and Michaely, 2004; Guay and Harford, 2000; Jagannathan et al.,
2000; Lee and Rui, 2007). However, our knowledge is limited with respect to the extent of and motivations for share repurchases
by rms outside the U.S.
We attempt to ll this research gap by analyzing the patterns of share repurchases by rms outside the U.S. Our purpose is to
determine the forces that shape rms' decisions to repurchase shares. Firms outside the U.S. operate in a variety of economic and
institutional environments and thus an examination of those rms provides an opportunity to test the robustness of the ndings
that are reported for U.S. rms. However, our investigation extends beyond simply checking the robustness of U.S. ndings by
addressing factors to which prior U.S. studies pay little attention. In particular, we examine the role and nature of cash holdings in
prompting rms to repurchase shares.
Our dataset is comprised of rms from seven major countriesAustralia, Canada, France, Germany, Japan, the U.K. and the
U.S.over the period 19982006. These countries are chosen because they have the largest stock markets among developed
countries. We learn that share repurchases are not as widely used in countries outside the U.S. as they are in the U.S. and that

Corresponding author. Tel.: + 82 2 3277 4650; fax: + 82 2 3227 2776.


E-mail addresses: blee2@cob.fsu.edu (B.S. Lee), jungwon_suh@ewha.ac.kr (J. Suh).
1
Tel.: + 1 850 644 4713; fax: + 1 850 644 4225.
0929-1199/$ see front matter 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.jcorpn.2011.06.006

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1307

dividends remain the primary payout method for non-U.S. rms. However, we nd that both U.S. and non-U.S. rms display a
common set of share repurchase patterns. For example, in all seven countries, share repurchases are used as a exible means of
distributing cash, as compared to dividends that are sticky. We also nd that, across countries, the majority of rms increase
dividends in the same year that they repurchase shares, which corroborates the U.S. result that rms do not nance repurchases by
reducing dividends (e.g., Dittmar, 2000; Jagannathan et al., 2000; Lee and Rui, 2007).
The main focus of our empirical investigation is placed on examining rm characteristics that are associated with share
repurchase decisions across countries. In our investigation, we stress the need to distinguish between dividend-payers and
non-dividend-payers among repurchasing rms, while prior studies tend to lump all repurchasing rms into a single group in
examining the determinants of share repurchases (e.g., Jagannathan et al., 2000; Kahle, 2002; Von Eije and Megginson,
2008). We nd that, across countries, key characteristics of repurchasing rms differ considerably depending on whether they
also pay dividends, which suggests that non-dividend-payers and dividend-payers may be under different circumstances
when they decide to repurchase shares. In particular, unlike their dividend-paying peers, non-dividend-paying repurchasing
rms are typically small and their protability is low and highly variable over time. Therefore, share repurchases may be the
only payout method that non-dividend-paying rms can afford, given that dividend payouts require long-term cash-ow
commitments.
Our investigation suggests that, among the rm characteristics we consider, cash holdings are signicantly associated with
share repurchases consistently across the seven countries for both dividend-payers and non-dividend-payers. Tobit regressions
show that, across countries, cash holdings have a signicantly positive effect on the amount of repurchases for both dividendpayers and non-dividend-payers after controlling for other rm characteristics. These observations are consistent with the excess
capital hypothesis (Dittmar, 2000). In contrast, other rm characteristicsrm size (log(TA)), protability (ROA), market-to-book
(MBR), lagged stock return (SRET), non-operating income (NOPER) and leverage (LEVER)are not consistently related to
repurchases in all countries. Thus, our international investigation lends little support to the hypotheses that rms repurchase
shares to exploit undervaluation of stocks (as indicated by the insignicant effect of low market-to-book and recent stock price
declines) or to perform recapitalization (as indicated by the insignicant effect of leverage).
To learn more about the nature of large cash holdings in shaping share repurchase decisions, we perform several additional
analyses. First, we examine whether large cash holdings held by repurchasing rms represent excess cash. Using the regression
model from Opler et al. (1999), we estimate the amount of excess cash of each rm. Our results show that, across countries, the
amount of estimated excess cash is relatively large for repurchasing rms, which indicates that much of cash held by repurchasing
rms is excess cash. Next in order to identify the period during which repurchasing rms build up large cash holdings, we analyze
changes in the level of cash holdings prior to share repurchases. We nd that repurchasing rms experience substantial increases
in cash holdings within three years prior to their repurchases. Thus, it appears that the large cash holdings associated with share
repurchase decisions are obtained relatively close to share repurchases.
Our nal analysis seeks to determine the source of large cash holdings of repurchasing rms. Across countries, there is little
evidence that repurchasing rms experience signicant improvements in operating protability or operating cash ows in the
periods surrounding share repurchases. Thus, consistent with the U.S. study of Grullon and Michaely (2004), our international
results do not support the cash-ow-signaling hypothesis that share repurchases signal improvements in operating performance.
Interestingly, however, in all seven countries, share repurchasing rms experience signicant reductions in capital expenditures
prior to share repurchases, suggesting that cash holdings for share repurchases are obtained as a result of reductions in capital
expenditures.
In summary, we nd that large cash holdings are the key rm characteristic that is signicantly associated with share
repurchases in all countries. There is evidence that the large cash holdings held by repurchasing rms represent excess cash.
Further, cash holdings tend to increase prior to share repurchases as a result of reductions in capital expenditures. These
observations can be related to at least two hypotheses: (i) rms use repurchases to reduce excess capital at managements' disposal
(Dittmar, 2000), thereby mitigating free-cash-ow or overinvestment problems (Jensen, 1986) and (ii) rms use repurchases to
distribute temporary cash ows. To elaborate, our nding of declining capital expenditures prior to share repurchases indicates
that investment opportunities are dwindling. In accordance with the free-cash-ow hypothesis, surplus cash held by such rms
should be distributed to shareholders instead of being retained and wasted by pursuing unprotable projects. Furthermore, in our
view, cash increases that arise from reductions in capital expenditures represent temporary cash ows in that such increases are
unlikely to be sustained unless rms continue to reduce capital expenditures year after year. In comparison, if cash holdings
increase as a result of improvement in operational performance, those increases would contain a larger permanent component,
assuming that protability is persistent. Hence, according to our evidence, cash ows that prompt share repurchases are transitory
in nature, a conclusion that ts nicely with the conventional wisdom that rms use repurchases to distribute temporary cash
ows.
Using international data, our study sheds light on the forces that shape rms' decision to repurchase shares. While many
studies examine the dividend policies of non-U.S. rms (e.g., Amihud and Murgia, 1997; Cannavan et al., 2004; Chay and Suh,
2009; Denis and Osobov, 2007; Dewenter and Warther, 1998; LaPorta et al., 2000), the current study is one of the few that
offer comprehensive evidence on the pattern of repurchases by non-U.S. rms. Although Von Eije and Megginson (2008)
examine payout policies that include share repurchases for former EU countries over 19892005, their focus is on dividends
because their sample includes a period during which dividends were the only payout method in many countries; for
example, open market share repurchases were illegal in Germany and were difcult to implement in France until 1998 (see,
e.g., Kim et al., 2005). Haw et al. (2011) perform cross-country analyses of share repurchase activities in thirty-three

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B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

countries, but their focus is placed on the valuation effects of share repurchases, not on the determinants of share repurchase
decisions.
The current study makes several contributions to the payout policy literature. First, we document evidence of the role and
natures of cash holdings in shaping repurchase decisions. In comparison, prior studiessuch as Guay and Harford (2000),
Jagannathan et al. (2000) and Kahle (2002)do not consider cash holdings as a determinant of share repurchases with exceptions
of Dittmar (2000) and Von Eije and Megginson (2008). Our evidence supports the excess capital hypothesis of Dittmar (2000) who
nds that share repurchases are positively related to cash holdings. Compared to her study, the current study provides much more
detailed evidence in favor of the excess capital hypothesis by demonstrating that repurchasing rms hold excess cash and
experience declines in investment opportunities prior to repurchases. According to our ndings, rms use share repurchases to
reduce cash holdings in order to mitigate overinvestment problems. In this regard, our ndings can be related to the recent study
of Ofcer (2011) who documents that rms use dividend initiations to reduce cash holdings in coping with overinvestment
problems.
The current study also adds to the evidence that rms use repurchases to distribute temporary cash ows. In search of evidence
for the temporary cash ow hypothesis, prior studies relate the temporary component of operating cash ows (Guay and Harford,
2000) or non-operating income (Dittmar, 2000; Jagannathan et al., 2000) to the amount of share repurchases. We complement
their evidence from a different angle by demonstrating that increases in cash holdings preceding share repurchase decisions are
transitory in nature because these increases are associated with reductions in capital expenditures.
Additionally, the current study suggests that it is essential to account for whether rms pay dividends in analyzing factors that
shape share repurchase decisions. Because dividends are sticky, dividend-paying (non-dividend-paying) rms continue to pay
(not pay) dividends. On the other hand, both dividend-paying and non-dividend-paying rms use share repurchases as a exible
means of distributing cash. We argue that an appropriate analysis of the determinants of share repurchases requires two sets of
analysis: one for dividend-payers and the other for non-dividend-payers. Our evidence suggests that lumping all repurchasing
rms together as a single groupas prior studies tend to docan lead to misleading conclusions. For example, Jagannathan et al.
(2000) and Kahle (2002) report that high cash-ow variability and large rm size are key characteristics of repurchasing rms.
However, our results show that high cash-ow variability is a key characteristic only for non-dividend-paying repurchasing rms, 2
whereas large rm size is a key characteristic only for dividend-paying repurchasing rms. Our results also suggest that rm size
and protability are key determinants of the amount of share repurchases for dividend-paying rms, but not necessarily for nondividend-paying rms.
2. Review of extant research
This section reviews the hypotheses and proxy variables put forth by extant U.S. studies regarding the motivations for share
repurchases. These studies report several reasons for corporate managers to distribute cash through share repurchases. For
example, share repurchases provide corporate managers with exibility in terms of timing and the amount of cash payouts (e.g.,
Grullon and Michaely, 2002), so many researchers hypothesize that rms use share repurchases to pay out temporary cash ows
(Dittmar, 2000; Guay and Harford, 2000; Jagannathan et al., 2000; Lee and Rui, 2007). These researchers use several different
approaches in nding evidence for this temporary cash ow hypothesis. Guay and Harford (2000) estimate the transitory
component from operating cash ows and nd that it is positively related to the decision to repurchase shares. Jagannathan et al.
(2000) and Dittmar (2000) use non-operating income as a proxy for temporary cash ows, and both nd that non-operating
income is positively related to share repurchases. Lee and Rui (2007) employ the vector autoregression model and nd that the
transitory component in aggregate time-series of earnings is positively related to share repurchases. While prior studies use a
variety of proxy variables in testing the temporary cash ow hypothesis, all of these proxies are based on prot measures, either
operating or non-operating in nature. However, as our results suggest below, temporary cash ows can arise from a different
source, e.g., through reductions in capital expenditures.
Some authors hypothesize that rms use share repurchases to distribute excess capital. This excess capital hypothesis relates
to the free cash ow hypothesis of Jensen (1986) in that excess capital gives rise to agency costs of overinvestments unless it is
distributed to shareholders. Dittmar (2000) uses cash holdings as a proxy for excess capital and nds that cash holdings are
positively related to share repurchases. However, an association between cash holdings and share repurchases may not be
sufcient evidence for the excess capital hypothesis. For a more complete analysis of this hypothesis, we need to examine whether
cash holdings associated with share repurchases are indeed excess capital through an investigation of the nature of those cash
holdings in relation to investment opportunities (or the lack thereof). Also, we need to examine whether and why rms pay out
excess capital through repurchases instead of through dividends.
Prior studies also propose the undervaluation (or signaling) hypothesis that rms use share repurchases to signal that their
stocks are undervalued (Chan et al., 2004; Comment and Jarrell, 1991; Dann, 1981; Vermaelen, 1981). These studies nd support
for this hypothesis by demonstrating that rms experience positive excess returns around announcements of share repurchases.
Stephens and Weisbach (1998) and Dittmar (2000) provide evidence for the undervaluation hypothesis by showing that rms

2
This observation corroborates Chay and Suh (2009) who present evidence that high cash-ow variability is a dominant characteristic of non-dividend-paying
rms across countries.

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

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conduct share repurchases when their stocks are undervalued in terms of market-to-book and lagged stock returns. In contrast,
Grullon and Michaely (2004) document that share repurchases are not associated with improvements in operating performance,
rejecting the cash-ow-signaling hypothesis. Therefore, prior studies suggest that share repurchases may signal undervaluation
but not improvement in operating performance.
U.S. studies also provide evidence that the presence of stock option programs inuences rms' decisions about share
repurchases (Fenn and Liang, 2001; Jolls, 1998; Jun et al., 2009; Kahle, 2002); that rms use share repurchases to defend
themselves against takeovers (Billett and Xue, 2007; Denis, 1990); and that some managers use share repurchases to mislead
investors (Chan et al., 2010). Tax may also inuence decisions to repurchase shares because, as compared to dividends, share
repurchases provide shareholders with tax benets (Barclay and Smith, 1988; Black, 1976). Grullon and Michaely (2002)
document that share repurchases become more frequent after the tax reform in 1987 that favors capital gains relative to dividend
income. Hsieh and Wang (2008) document evidence that inside shareholders' tax preferences affect the rm's choice of payout
method between dividends and share repurchases.
3. Research focus and the description of data
In addition to documenting the relative importance of share repurchases as a payout method for rms outside the U.S., we aim
to determine the rm characteristics that are associated with share repurchase decisions, thereby testing extant repurchase
hypotheses. However, data limitations preclude our testing all of the hypotheses described above. For example, data pertaining to
stock options and takeover defense are not available for our sample rms outside the U.S., which prevents us from testing the
importance of those factors in shaping repurchase decisions. Our empirical analyses are conducted mainly on a country-bycountry basis, rather than on the pooled dataset of the seven sample countries. It is not our interest to identify country-level factors
that correlate with the amount of share repurchases across countries. As described below, while repurchases were legalized in
many countries outside the U.S. in the mid- to late-1990s, some countries still have regulations in place that limit the ease and
magnitude of share repurchases. These regulatory hindrances make it difcult to evaluate the importance of country-level factors,
such as a country's legal system or income tax structure, that gives rise to variation in the amount of share repurchases across
countries.
We use the Worldscope database to construct our dataset. A key data item in our study is the amount of share repurchases
that is, the amount of cash that a rm expends to reduce common shares in circulation in order either to retain these shares as
treasury shares or to cancel them. Our approach to collecting share repurchase data is comparable to that of Grullon and
Michaely (2002), who use Compustat to obtain the actual amount of cash that is distributed to shareholders through share
repurchases within a given scal year. In doing so, they subtract Compustat #56 (reduction in the value of the net number of
preferred stock outstanding) from Compustat #115 (total expenditure on the purchase of common and preferred stocks). Banyi
et al. (2008) nd that this Compustat-based measure is the most accurate estimate of actual repurchases, although it contains
some errors. The Worldscope item that corresponds to Compustat #115 is common/preferred, retired, converted, etc. (#04751),
a cash-ow statement item. According to the Worldscope data guide, this item indicates the amount of funds that a company
uses to reduce outstanding shares of common or preferred stock. However, the Worldscope database does not provide an item
that appropriately corresponds to Compustat #56. Given that we are not able to identify the amount of cash used to reduce
preferred shares, we drop rms that have preferred stock on their balance sheets, even if these rms might repurchase common
shares during a given year. However, we nd that we lose only a small fraction of the rms in the dataset by excluding those that
have preferred stock.
Our dataset includes rm-year observations from seven developed countriesAustralia, Canada, France, Germany, Japan, the
U.K., and the U.S.over the period 19982006. We choose 1998 as the rst year of our sample period primarily because, as
described below, open market share repurchases were illegal or very difcult to implement for several countries (e.g. Germany
and France) until the late 1990s. We drop nancial services rms in constructing our dataset. Our key variable is the amount of
share repurchases scaled by the beginning-of-the-year book assets (REPR). We also examine the amount of dividends scaled by
the beginning-the-year book assets (DIVR). In constructing our dataset, we drop rm-years if they do not have records of both
share repurchases and dividends. To deal with outliers, we remove rm-years if REPR is less than zero or greater than one, and if
DIVR is greater than one.
To identify rm characteristics that are associated with share repurchases, we collect nine rm characteristic variables for our
sample rms. These nine variables represent a range of rm characteristics: rm size (TA), market-to-book equity ratio (MBR),
cash holdings (CASH), operating protability (ROA), debt-to-equity ratio (LEVER), stock returns (SRET), non-operating prot
(NOPER), retained earnings scaled by total equity (RE/TE), and operating prot variability (ROAVOL). We deal with extreme values
by Winsorizing these nine variables at the bottom and top one percent of their respective distributions each year. For MBR and
RE/TE, we treat their values as missing if the equity book value is negative. Table A1 provides denitions of our two payout and
nine rm characteristic variables.
Using these variables, we test several hypotheses considered by U.S. studies. The amount of cash holdings (CASH) is a proxy
in testing the excess capital hypothesis, which predicts that rms with large cash holdings repurchase shares to distribute
excess capital. Market-to-book (MBR) and lagged stock returns (SRET) are proxy variables for undervaluation in testing the
undervaluation hypothesis, which predicts that rms with low MBR and negative SRET repurchase shares. Non-operating income
(NOPER) is used as a proxy for temporary cash ows in testing the hypothesis that rms use repurchases to distribute temporary
cash ows. Debt-to-equity ratio is used to examine the hypothesis that rms with low leverage use share repurchases for

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B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

recapitalization purposes. Firm size (TA), retained earnings (RE/TE) and operating prot volatility (ROAVOL) are control variables
in our regression analysis of the amount of share repurchases. DeAngelo et al. (2006) document that retained earnings, their proxy
for nancial life cycle stage, have a positive effect on a rm's decision to pay dividends. Chay and Suh (2009) present evidence that
cash-ow variability, such as operating prot volatility, is a dominant determinant of a rm's decision concerning whether to pay
dividends and how much to pay.
These hypotheses are not mutually exclusive, so acceptance of one hypothesis does not mean rejection of another. For example,
both the excess capital hypothesis and the temporary cash ow hypothesis can hold if excess capital associated with share
repurchases arises from temporary cash ows. We emphasize that there are no clean-cut proxy variables for some hypotheses; in
particular, cash holdings are a less than adequate proxy for excess capital, given that large cash holdings are not necessarily the
same as excess capital. Further, although non-operating income is a proxy for temporary cash ows, it is not the only proxy that
can be used to test the temporary cash ow hypothesis. Therefore, as we will see below, a lack of association between nonoperating income and share repurchases does not necessarily dictate rejection of that hypothesis.
4. Empirical evidence
4.1. The relative importance of share repurchases vs. dividends as a payout method
We begin by examining the relative use of share repurchases and dividends across seven major countries. Following Grullon
and Michaely (2002), we analyze the number and percentage of rms that adopt each of four payout policies: (A) a policy of
distributing nothing (REPR = 0 and DIVR = 0); (B) a policy of distributing cash only through dividends (REPR = 0 and DIVR N 0);
(C) a policy of distributing cash only through share repurchases (REPR N 0 and DIVR = 0); and (D) a policy of distributing cash
through both share repurchases and dividends (REPR N 0 and DIVR N 0).
Table 1 presents the number and percentage of rms that adopt each payout policy over the sample period 19982006 for
each country. Consistent with prior U.S. studies, the number and percentage of rms that repurchase shares are very high in the
U.S. For example, in 2006, 1,180 (=579 + 601) rms use share repurchases solely or in conjunction with dividends, which is
more than twice the number of rms that use only dividends (421 rms). Interestingly, throughout most of the sample period,
the number of U.S. rms that only repurchase shares is greater than the number of those that only pay dividends or the number
of those that both repurchase shares and pay dividends. By contrast, as the table shows, non-U.S. rms do not commonly use
share repurchases. The percentage of rms that distribute cash using repurchases, either solely or in conjunction with dividends,
is small for rms outside the U.S. With the exception of Japanese rms, non-U.S. rms generally use dividends as their primary
payout method. For example, in 2006, the percentage of rms that distribute cash only through dividends is as high as 81.9% in
Australia and 74.6% in Germany. 3
Table 2 reports the amount of cash that is distributed through share repurchases and dividends for the seven major countries
under study. As expected, U.S. rms tend to distribute more cash through share repurchases than through dividends. For example,
for U.S. rms that use both share repurchases and dividends (D: REPR N 0, DIVR N 0), both the mean and median repurchases-tototal assets ratios (REPR)4.385% and 1.960%, respectivelyare higher than the mean and median dividends-to-total assets ratios
(DIVR)2.472% and 1.685%, respectively. In contrast, rms outside the U.S. generally distribute more cash through dividends than
through share repurchases. For example, for Australian rms that use both share repurchases and dividends (D: REPR N 0,
DIVR N 0), the median DIVR, 4.193%, is much greater than the median REPR of 1.739%. A similar pattern is found for other countries
outside the U.S. 4
Why are share repurchases relatively uncommon among non-U.S. rms? A key factor may be that, until recently, share
repurchases remained illegal or were difcult to implement in several countries. Lamba and Ramsay (2005) report that, in
Australia, share repurchases became legal in 1989 but were difcult to implement until 1995 when the country's legal regulation
of share repurchases was simplied. Kim et al. (2005) document that open market share repurchases were illegal in Germany and
very difcult to implement in France until 1998. These authors also report that a few restrictions still hinder the implementation of
share repurchases in several countries; for example, Canada imposes a 5% ceiling on the proportion of shares that a rm can
repurchase, and in France, Germany and the U.K., rms must obtain shareholder approval before implementing share repurchases,
whereas board approval is sufcient in the U.S.
Another potentially important factor is the use of stock options (or the lack thereof) as a compensation tool among non-U.S.
rms. Prior studies attribute the rise in share repurchases among U.S. rms to an increased use of stock options (e.g., Fenn and
Liang, 2001; Kahle, 2002). To our knowledge, there is no systematic cross-country comparative study of stock options, but it is
likely that U.S. rms use stock options more commonly than non-U.S. rms do. Kato et al. (2005) reports that the use of stock
options programs was permitted by law only in the late 1990s in Japan. Sanders and Tuschke (2007) and Coulton and Taylor

3
There is evidence to suggest that the use of share repurchases is on the rise in some countries. For example, in France, the percentage of rms that use share
repurchases in conjunction with dividends increases steadily over the sample period (from 8.5% in 1998 to 40.5% in 2006). A similar pattern is observed in Japan.
4
The amount of cash distributed through share repurchases by Japanese rms is very small, although there is a comparatively high number of share
repurchasing rms in that country as reported in Table 1. For example, as shown in Table 2, for the Japanese rms that use both dividends and share repurchases
(D: REPR N 0, DIVR N 0), their median REPR, 0.057%, is much lower than their median DIVR, 0.715%. This observation is in line with Uchida and Xu (2008) who use
data collected from the Nikkei Economic Electronic Database System (NEEDS) to document that the amount of share repurchases is much smaller than the
amount of dividends in Japan.

Table 1
Frequency of each payout policy by country and year. The table reports the number of rms that adopt a given payout policy for seven major countries over the period 19982006. In a given year, rms in each country are
divided into four categories according to their payout policy: (A) a policy of distributing nothing (REPR = 0, DIVR = 0); (B) a policy of distributing cash only through dividends (REPR = 0, DIVR N 0); (C) a policy of distributing
cash only through share repurchases (REPR N 0, DIVR = 0); and (D) a policy of distributing cash through both share repurchases and dividends (REPR N 0, DIVR N 0). The numbers under column N are the numbers of rms that
adopt a given payout policy for each year. The numbers under column Percent (i.e., the numbers in parentheses) are the percentages of rms that adopt a given payout policy among those rms that distribute cash through
either dividends or share repurchases or both.
Type

Australia

A
B
C
D
A
B
C
D
A
B
C
D
A
B
C
D
A
B
C
D
A
B
C
D
A
B
C
D

1998
N

Canada

France

Germany

Japan

U.K.

U.S.

34
96
2
8
62
39
23
16
22
97
0
9
41
137
0
0
10
224
1
19
145
462
3
60
1144
308
523
439

1999
Percent
(90.6)
(1.9)
(7.5)
(50.0)
(29.5)
(20.5)
(91.5)
(0.0)
(8.5)
(100.0)
(0.0)
(0.0)
(91.8)
(0.4)
(7.8)
(88.0)
(0.6)
(11.4)
(24.3)
(41.2)
(34.6)

N
35
95
1
15
119
35
49
24
30
113
2
7
61
165
2
7
20
129
1
30
161
457
9
88
1520
260
732
514

2000
Percent
(85.6)
(0.9)
(13.5)
(32.4)
(45.4)
(22.2)
(92.6)
(1.6)
(5.7)
(94.8)
(1.1)
(4.0)
(80.6)
(0.6)
(18.8)
(82.5)
(1.6)
(15.9)
(17.3)
(48.6)
(34.1)

N
57
115
3
21
131
40
42
37
61
146
3
19
88
146
14
30
130
548
42
423
192
424
24
132
1740
241
729
539

2001
Percent
(82.7)
(2.2)
(15.1)
(33.6)
(35.3)
(31.1)
(86.9)
(1.8)
(11.3)
(76.8)
(7.4)
(15.8)
(54.1)
(4.1)
(41.8)
(73.1)
(4.1)
(22.8)
(16.0)
(48.3)
(35.7)

N
160
145
3
37
142
62
42
23
101
152
8
21
122
154
23
28
149
603
48
512
310
444
26
127
1816
307
850
464

2002
Percent
(78.4)
(1.6)
(20.0)
(48.8)
(33.1)
(18.1)
(84.0)
(4.4)
(11.6)
(75.1)
(11.2)
(13.7)
(51.8)
(4.1)
(44.0)
(74.4)
(4.4)
(21.3)
(18.9)
(52.4)
(28.6)

N
265
201
15
24
155
72
41
25
107
151
3
27
159
140
20
26
189
541
108
700
385
472
28
135
1945
390
818
416

2003
Percent
(83.8)
(6.3)
(10.0)
(52.2)
(29.7)
(18.1)
(83.4)
(1.7)
(14.9)
(75.3)
(10.8)
(14.0)
(40.1)
(8.0)
(51.9)
(74.3)
(4.4)
(21.3)
(24.0)
(50.4)
(25.6)

N
265
219
19
32
164
90
34
35
108
169
18
32
165
148
19
24
136
429
103
902
379
507
42
129
2036
454
708
479

2004
Percent
(81.1)
(7.0)
(11.9)
(56.6)
(21.4)
(22.0)
(77.2)
(8.2)
(14.6)
(77.5)
(9.9)
(12.6)
(29.9)
(7.2)
(62.9)
(74.8)
(6.2)
(19.0)
(27.7)
(43.1)
(29.2)

N
234
248
16
34
176
118
31
42
115
159
8
55
138
153
21
25
110
468
74
938
423
524
36
160
2033
489
600
543

2005
Percent
(83.2)
(5.4)
(11.4)
(61.8)
(16.2)
(22.0)
(71.6)
(3.6)
(24.8)
(76.9)
(10.6)
(12.6)
(31.6)
(5.0)
(63.4)
(72.8)
(5.0)
(22.2)
(30.0)
(36.8)
(33.3)

N
233
270
9
53
226
154
32
46
53
141
22
81
134
161
11
25
82
420
61
1057
479
538
55
197
2058
502
647
607

2006
Percent
(81.3)
(2.7)
(16.0)
(66.4)
(13.8)
(19.8)
(57.8)
(9.0)
(33.2)
(81.7)
(5.6)
(12.7)
(27.3)
(4.0)
(68.7)
(68.1)
(7.0)
(24.9)
(28.6)
(36.8)
(34.6)

N
174
263
11
47
202
126
34
46
76
128
26
105
110
156
17
36
70
465
55
1045
431
440
42
233
1567
421
579
601

Percent
(81.9)
(3.4)
(14.6)
(61.2)
(16.5)
(22.3)
(49.4)
(10.0)
(40.5)
(74.6)
(8.1)
(17.2)
(29.7)
(3.5)
(66.8)

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Country

(61.5)
(5.9)
(32.6)
(26.3)
(36.2)
(37.5)

1311

1312

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Table 2
Amount of cash distributed through dividends and share repurchases. The table reports the mean and median values for the amount of cash distributed through
dividends and share repurchases by three groups of rm-years: (B) those in which rms only pay dividends (REPR = 0, DIVR N 0); (C) those in which rms only
repurchase shares (REPR N 0, DIVR = 0); and (D) those in which rms pay dividends and repurchase shares (REPR N 0, DIVR N 0). The sample covers the period
19982006. DIVR, REPR, and TOTALR are the amount of cash dividends, the amount of share repurchases, and the sum of cash dividends and share repurchases,
respectively. All three payout variables are scaled by total assets.
Country

Type

Australia

B
C
D
B
C
D
B
C
D
B
C
D
B
C
D
B
C
D
B
C
D

1652
79
271
736
328
294
1256
90
356
1360
127
201
3827
493
5626
4268
265
1261
3372
6186
4602

Canada

France

Germany

Japan

U.K.

U.S.

DIVR

REPR

TOTALR

Mean

Median

Mean

Median

Mean

Median

6.998%
.
6.193%
7.513%
.
2.976%
2.565%
.
2.315%
2.962%
.
2.986%
0.862%
.
0.991%
3.488%
.
3.277%
3.383%
.
2.472%

[4.736%]
.
[4.193%]
[4.891%]
.
[1.201%]
[1.422%]
.
[1.590%]
[1.618%]
.
[1.975%]
[0.613%]
.
[0.715%]
[2.501%]
.
[2.453%]
[1.595%]
.
[1.685%]

.
8.911%
5.223%
.
3.109%
2.443%
.
2.699%
1.732%
.
2.762%
2.178%
.
0.510%
0.667%
.
6.498%
4.252%
.
5.196%
4.385%

.
[2.229%]
[1.739%]
.
[0.854%]
[0.741%]
.
[0.354%]
[0.494%]
.
[0.780%]
[1.034%]
.
[0.008%]
[0.057%]
.
[1.547%]
[1.488%]
.
[1.751%]
[1.960%]

6.998%
8.911%
11.416%
7.513%
3.109%
5.419%
2.565%
2.699%
4.048%
2.962%
2.762%
5.164%
0.862%
0.510%
1.658%
3.488%
6.498%
7.529%
3.383%
5.196%
6.857%

[4.736%]
[2.229%]
[6.419%]
[4.891%]
[0.854%]
[2.583%]
[1.422%]
[0.354%]
[2.476%]
[1.618%]
[0.780%]
[3.441%]
[0.613%]
[0.008%]
[1.002%]
[2.501%]
[1.547%]
[4.557%]
[1.595%]
[1.751%]
[4.374%]

(2002) report that stock options programs are not widely used in Germany and Australia, respectively. Therefore, there is a
possibility that the relative lack of share repurchases by non-U.S. rms may be due in part to the fact that the use of stock options is
less common in countries outside the U.S.
One can also consider the possibility that different taxation structures may limit share repurchase activities in countries outside
the U.S. The U.S. taxation structure favors share repurchases more than dividends because long-term capital gains are generally
taxed at lower rates than dividend income. However, capital gains are taxed at lower rates than dividend income in several other
countries as well. For example, in Germany, long-term capital gains are tax-exempt; in Canada, only 50% of a capital gain is taxed at
an ordinary rate; and in Japan, capital gains are taxed at a rate as low as 10%. 5 Still, despite relatively low tax rates applied to capital
gains, share repurchases are relatively uncommon in these countries, which suggests that taxation structures are unlikely to
provide a satisfactory explanation. In a related study, LaPorta et al. (2000) document that differences in the amount of dividend
payouts among countries are not signicantly associated with the degree of dividend tax penalty.
4.2. Stability of payout policies
This section uses transition matrices to analyze the stability of payout policies across countries. This analysis helps to highlight
the nature of repurchases (vs. dividends) and to evaluate the extent to which the four payout policiesA, B, C and Dare distinct
from or connected to one another.
Table 3 presents transition matrices for rms in the seven major countries over the period 19982006. First, the table shows
that, across countries, rms that only pay dividends (B: REPR = 0, DIVR N 0) display a high propensity to retain their dividendpaying policy in the subsequent year. The probability that a rm that only pays dividends continues to do so in the subsequent year
ranges from 70.6% to 87.2% across our sample countries. In contrast, rms that only repurchase shares (C: REPR N 0, DIVR = 0)
display much weaker stability in their payout policy. In Australia, for example, only 31.7% of rms that use only share repurchases
implement the same payout policy in the subsequent year. A related observation is that many of the rms that only repurchase
shares tend to make no cash payouts in the subsequent year. For example, in the U.S., as many as 31.7% of rms that only
repurchase shares distribute no cash in the subsequent year. Moreover, the table shows that many rms that use both share
repurchases and dividends (D: REPR N 0, DIVR N 0) continue to pay dividends, but do not continue to repurchase shares in the
subsequent year (e.g., 43.9% in Australia). These observations are consistent with the conventional wisdom that share repurchases
are used as a exible means of distributing cash, while dividends are sticky. Grullon and Michaely (2002) report similar patterns
using transition matrices for U.S. rms.
Another notable pattern from Table 3 is that it is rare for rms that only pay dividends (B: DIVR N 0, REPR = 0) to switch to a
policy that only repurchases shares (C: REPR N 0, DIVR = 0) in the subsequent year. In all countries, the probability of rms

The source of these tax rates is the worldwide tax summaries of PricewaterhouseCooper (www.pwc.com).

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1313

Table 3
Transition probabilities. The table reports the numbers and conditional probabilities of rms switching from one payout policy to another over the period 1998
2006. In a given year, rms in each country are divided into four categories according to their payout policy: (A) a policy of distributing nothing (REPR = 0,
DIVR = 0); (B) a policy of distributing cash only through dividends (REPR = 0, DIVR N 0); (C) a policy of distributing cash only through share repurchases (REPR N 0,
DIVR = 0); and (D) a policy of distributing cash through both share repurchases and dividends (REPR N 0, DIVR N 0). Column T = 0 is the payout policy during the
current year and Column T = 1 is the payout policy in the following year. The numbers in parentheses are conditional probabilities.
T=0

T=1

Australia

Canada

France

Germany

Japan

U.K.

U.S.

983
(87.4%)
101
(9.0%)
30
(2.7%)
11
(1.0%)

903
(87.9%)
28
(2.7%)
91
(8.9%)
5
(0.5%)

403
(82.6%)
44
(9.0%)
38
(7.8%)
3
(0.6%)

671
(81.8%)
96
(11.7%)
40
(4.9%)
13
(1.6%)

525
(68.4%)
141
(18.4%)
73
(9.5%)
29
(3.8%)

1903
(88.5%)
142
(6.6%)
92
(4.3%)
14
(0.7%)

10606
(84.6%)
168
(1.3%)
1681
(13.4%)
75
(0.6%)

1125

1027

488

820

768

2151

12530

61
(4.7%)
1129
(87.2%)
3
(0.2%)
102
(7.9%)

17
(3.1%)
471
(85.8%)
2
(0.4%)
59
(10.7%)

48
(4.7%)
860
(83.8%)
2
(0.2%)
116
(11.3%)

103
(9.2%)
937
(83.8%)
3
(0.3%)
75
(6.7%)

112
(3.5%)
2258
(70.6%)
23
(0.7%)
805
(25.2%)

152
(4.2%)
3064
(84.1%)
12
(0.3%)
415
(11.4%)

116
(4.3%)
1976
(72.7%)
11
(0.4%)
614
(22.6%)

1295

549

1026

1118

3198

3643

2717

25
(39.7%)
11
(17.5%)
20
(31.7%)
7
(11.1%)

97
(37.3%)
6
(2.3%)
141
(54.2%)
16
(6.2%)

21
(42.0%)
5
(10.0%)
20
(40.0%)
4
(8.0%)

35
(38.9%)
6
(6.7%)
43
(47.8%)
6
(6.7%)

24
(5.7%)
7
(1.7%)
272
(64.8%)
117
(27.9%)

83
(40.5%)
16
(7.8%)
95
(46.3%)
11
(5.4%)

1656
(31.7%)
36
(0.7%)
3352
(64.2%)
179
(3.4%)

63

260

50

90

420

205

5223

6
(2.9%)
90
(43.9%)
5
(2.4%)
104
(50.7%)

1
(0.4%)
69
(29.2%)
5
(2.1%)
161
(68.2%)

3
(1.5%)
51
(25.2%)
6
(3.0%)
142
(70.3%)

8
(5.6%)
47
(32.9%)
4
(2.8%)
84
(58.7%)

10
(0.2%)
382
(8.6%)
60
(1.3%)
4015
(89.9%)

21
(2.1%)
325
(33.2%)
10
(1.0%)
622
(63.6%)

34
(0.9%)
658
(17.4%)
39
(1.0%)
3052
(80.7%)

205

236

202

143

4467

978

3783

B
C
D

B
C
D

B
C
D

B
C
D
N

switching from a dividend-only policy to a repurchase-only policy is less than 1%. Similarly, it is rare for rms that only repurchase
shares to switch to a policy that only pays dividends in the subsequent year. Thus, rms generally do not drop dividends in order to
adopt share repurchases as a payout method, nor do they drop share repurchases to adopt dividends. This observation gives the
impression that the two payout methods may serve different purposesfor example, as prior studies suggest, repurchases pay
temporary cash ows, while dividends pay permanent cash ows.
We also look at the question concerning whether rms fund share repurchases by reducing dividends. Specically, we examine
whether rms tend to decrease dividends when they repurchase shares. Table 4 tabulates the frequencies and proportions of rms
that increase, decrease or leave dividends unchanged, conditional on whether or not these rms repurchase shares in the same
year. In constructing this table, we exclude non-dividend-paying rm-years because the question of whether share repurchases
are funded through dividend reductions is irrelevant for non-dividend-payers. The numbers in the rst column of the table
indicate that, across countries, when rms repurchase shares, the majority of them increase dividends in the same year. For
example, in Australia, of 261 rms that repurchase shares, as many as 196 of these rms (75%) also increase dividends. In all
sample countries, more than half of the repurchasing rms increase dividends in the same year. Hence, our international evidence
does not suggest that share repurchases are funded through dividend reductions. This observation corroborates prior U.S. studies,
such as those of Guay and Harford (2000) and Dittmar (2000). 6
6
Our observation does not imply rejection of the substitution hypothesis considered by Grullon and Michaely (2002). Their substitution hypothesis assumes
that share repurchases use funds that would otherwise be used to increase dividends more, which is different from the notion that share repurchases use funds
that are obtained by reducing dividends. Although it is impractical to replicate their test because our international data have limited time-series observations, it is
plausible that rms could increase dividends more if they do not repurchased shares.

1314

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Table 4
Share repurchases and dividend increases. The table reports the number of rm-years in which rms increase, decrease, keep dividends unchanged for two groups
of rms: those rms that repurchase shares (Repurchase) and those rms that do not repurchase shares (No repurchase) in a given year over the period 1998
2006. The sample for this analysis excludes rm-years in which rms only repurchase shares or make no payouts. The numbers in parentheses are the proportions
of rm-years in which rms increase, decrease or keep dividends unchanged among the total number of rm-years in each group.
Country

Repurchase

No repurchase

Australia
Dividend increase
No dividend increase
Dividend decrease
Total

196
0
65
261

(0.75)
(0.00)
(0.25)

1370
0
220
1590

(0.86)
(0.00)
(0.14)

Dividend increase
No dividend increase
Dividend decrease
Total

233
0
56
289

(0.81)
(0.00)
(0.19)

579
0
113
692

(0.84)
(0.00)
(0.16)

Dividend increase
No dividend increase
Dividend decrease
Total

268
0
80
348

(0.77)
(0.00)
(0.23)

995
7
235
1237

(0.80)
(0.01)
(0.19)

Dividend increase
No dividend increase
Dividend decrease
Total

147
0
53
200

(0.74)
(0.00)
(0.27)

978
11
351
1340

(0.73)
(0.01)
(0.26)

Dividend increase
No dividend increase
Dividend decrease
Total

3165
0
2443
5608

(0.56)
(0.00)
(0.44)

2499
0
1263
3762

(0.66)
(0.00)
(0.34)

Dividend increase
No dividend increase
Dividend decrease
Total

867
0
374
1241

(0.70)
(0.00)
(0.30)

3512
1
636
4149

(0.85)
(0.00)
(0.15)

Dividend increase
No dividend increase
Dividend decrease
Total

3407
0
1150
4557

(0.75)
(0.00)
(0.25)

2717
2
585
3304

(0.82)
(0.00)
(0.18)

Canada

France

Germany

Japan

U.K.

U.S.

4.3. Firm characteristics of share repurchasing rms


This section examines rm characteristics of repurchasing rms based on nine variables (described above) that represent a
variety of rm characteristics. In conducting the analysis, we take into consideration that repurchasing rms may have different
rm characteristics, depending on whether they are dividend-payers. Due to the permanent nature of dividend payouts, nondividend-paying repurchasing rms (C: REPR N 0, DIVR = 0) and dividend-paying repurchasing rms (D: REPR N 0, DIVR N 0) may
be distinct from each other.
Table 5 reports the mean and median values of nine rm characteristic variables for the four groups of rms for each of the
seven major countries. Indeed, the table shows that, across countries, the two groups of repurchasing rms differ from each other
in terms of several rm characteristics. For example, in all countries, non-dividend-paying repurchasing rms (C: REPR N 0,
DIVR = 0) are small, as compared to their dividend-paying peers (D: REPR N 0, DIVR N 0). In Australia, the median rm size (TA) of
non-dividend-paying repurchasing rms is US$217.40 million, while the median rm size of dividend-paying repurchasing rms
is more than ten times greater at US$2,562.26 million. Moreover, across countries, non-dividend-paying repurchasing rms are
relatively not protable and their protability is highly unstable, as compared to their dividend-paying peers. For example, in
Germany, the median ROA for non-dividend-paying repurchasing rms is only approximately 1%, while the corresponding ROA
value for dividend-paying peers is much higher at 9%. In the U.K., the mean operating prot volatility (ROAVOL) for the former
rms is 0.16, which is four times greater than the corresponding value for the latter rms at 0.04.
Panel 1 of Table 6 tests the signicance of difference in rm characteristics between the two groups of repurchasing rms, C
(REPR N 0, DIVR = 0) and D (REPR N 0, DIVR N 0), on the basis of t statistics and Wilcoxon-rank-sum z statistics. Across countries,
these two groups are signicantly different in both mean and median values for ve rm characteristics: log(TA), CASH, ROA,
RE/TE and ROAVOL. In sum, among repurchasing rms, non-dividend-payers are smaller and carry larger cash holdings than
dividend-payers. The former rms are also less protable, have lower retained earnings, and experience higher operating prot
variability than the latter rms. These observations are not surprising because they are consistent with well-documented

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1315

Table 5
Firm characteristics by payout policy. The table reports the mean and median values for key rm characteristic variables for our sample of rm-year observations
over the period 19982006. In a given year, rms in each country are divided into four categories according to their payout policy: (A) a policy of distributing
nothing (REPR = 0, DIVR = 0); (B) a policy of distributing cash only through dividends (REPR = 0, DIVR N 0); (C) a policy of distributing cash only through share
repurchases (REPR N 0, DIVR = 0); and (D) a policy of distributing cash through both share repurchases and dividends (REPR N 0, DIVR N 0).The denitions of the
rm characteristic variables are provided in Table A1.
(B) REPR = 0, DIVR N 0

(A) REPR = 0, DIVR = 0

(C) REPR N 0, DIVR = 0

(D) REPR N 0, DIVR N 0

Country

Variable

Mean

Median

Mean

Median

Mean

Median

Mean

Median

Australia

TA (mil U$)
MBR
CASH (%)
ROA
LEVER (%)
SRET (%)
NOPER
RE/TE
ROAVOL
TA (mil U$)
MBR
CASH (%)
ROA
LEVER (%)
SRET (%)
NOPER
RE/TE
ROAVOL
TA (mil U$)
MBR
CASH (%)
ROA
LEVER
SRET (%)
NOPER
RE/TE
ROAVOL
TA (mil U$)
MBR
CASH (%)
ROA
LEVER (%)
SRET (%)
NOPER
RE/TE
ROAVOL
TA (mil U$)
MBR
CASH (%)
ROA
LEVER (%)
SRET (%)
NOPER
RE/TE
ROAVOL
TA (mil U$)
MBR
CASH (%)
ROA
LEVER (%)
SRET (%)
NOPER
RE/TE
ROAVOL
TA (mil U$)
MBR
CASH (%)
ROA
LEVER (%)
SRET (%)
NOPER
RE/TE
ROAVOL

617.91
3.33
27.69
0.39
24.12
12.06
0.03
4.24
0.48
2462.00
4.08
25.06
0.25
28.75
38.07
0.00
2.26
0.26
6004.16
3.62
14.90
0.06
79.26
4.52
0.02
0.75
0.18
7921.85
2.84
19.61
0.08
68.68
3.33
0.03
1.44
0.18
19717.76
2.61
16.36
0.01
157.10
1.99
0.00
0.69
0.06
2276.77
4.43
27.86
0.31
27.20
8.09
0.01
2.38
0.40
4553.82
5.26
27.68
0.48
51.10
30.37
0.01
3.05
0.44

128.59
1.64
16.87
0.13
0.00
11.76
0.01
1.28
0.22
557.30
2.27
15.13
0.05
0.64
0.00
0.00
0.43
0.11
659.65
1.74
8.89
0.01
25.48
14.94
0.01
0.02
0.08
1011.89
1.38
9.84
0.01
13.79
17.22
0.02
0.10
0.11
5168.67
1.17
11.70
0.01
70.85
15.09
0.00
0.03
0.04
181.78
1.88
15.56
0.09
0.22
15.17
0.00
0.36
0.18
526.97
2.32
15.42
0.02
2.68
1.94
0.00
0.31
0.11

1437
1937
2143
1978
2062
1921
2128
2024
874
1452
1629
1947
1869
1882
1490
1950
1834
919
689
580
695
660
628
607
695
616
552
1043
904
1031
1000
999
878
1045
986
761
899
801
899
883
870
791
897
849
755
2845
2773
3307
3264
3122
2503
3254
3013
1793
16976
13596
18072
17176
16390
14352
18247
14751
10667

9692.26
2.58
10.65
0.11
42.84
30.35
0.02
0.10
0.07
12319.00
2.26
5.73
0.09
53.09
26.25
0.00
0.21
0.05
35225.34
2.79
13.67
0.09
55.10
23.30
0.02
0.15
0.03
49752.02
2.64
11.44
0.08
66.96
21.12
0.03
0.37
0.05
35798.07
2.00
16.64
0.06
67.22
16.56
0.00
0.48
0.03
13826.67
3.03
11.31
0.09
41.04
20.16
0.01
0.21
0.06
28179.90
2.58
10.58
0.09
83.16
21.26
0.00
0.48
0.05

1300.90
1.65
4.77
0.09
25.79
18.40
0.01
0.17
0.03
4126.10
1.69
1.41
0.08
32.34
21.09
0.00
0.15
0.03
3675.65
1.78
10.47
0.08
27.68
14.40
0.01
0.13
0.02
4798.92
1.90
6.98
0.07
28.12
12.07
0.02
0.39
0.02
7786.29
1.29
13.29
0.04
26.04
1.74
0.00
0.53
0.02
1418.03
1.53
6.43
0.08
12.94
12.56
0.00
0.36
0.03
6592.20
1.82
3.96
0.08
46.07
12.93
0.00
0.63
0.03

1638
1608
1654
1633
1667
1470
1642
1649
1023
754
734
757
753
760
650
756
694
472
1268
1233
1259
1206
1264
1191
1267
1231
1063
1374
1327
1289
1341
1365
1284
1369
1361
1204
3828
3618
3824
3797
3823
3470
3822
3784
3265
4274
4069
4164
4248
4189
3926
4262
4176
3460
3447
3307
3232
3379
3420
3197
3444
3184
2973

1427.00
2.75
28.67
0.12
33.36
28.10
0.01
2.02
0.32
4503.69
2.66
20.88
0.02
46.84
20.50
0.01
0.31
0.11
6910.94
3.57
26.32
0.00
33.11
19.63
0.02
0.07
0.13
7753.16
2.86
30.48
0.04
21.10
12.22
0.02
0.63
0.19
11868.76
2.96
14.86
0.03
105.03
5.18
0.00
0.86
0.09
4716.59
1.91
19.33
0.02
27.33
10.31
0.01
0.60
0.16
9853.42
3.55
24.88
0.00
51.18
19.22
0.01
0.50
0.13

217.40
1.36
21.44
0.02
0.04
4.31
0.00
0.62
0.17
848.03
1.64
8.83
0.07
10.45
8.70
0.00
0.12
0.07
778.75
1.88
20.70
0.02
4.11
7.27
0.01
0.01
0.10
878.84
1.37
24.11
0.01
1.11
0.54
0.01
0.04
0.12
3897.34
1.00
10.85
0.00
41.34
9.92
0.00
0.00
0.05
780.12
0.89
8.25
0.00
0.22
0.00
0.00
0.01
0.04
1786.42
2.06
16.78
0.08
7.26
2.54
0.00
0.24
0.06

78
85
90
86
91
84
91
88
40
334
318
347
335
346
279
348
343
180
93
81
91
85
87
80
93
85
66
130
120
130
110
130
100
130
127
71
493
484
493
492
486
485
492
484
467
261
252
272
272
269
240
272
268
181
6468
5876
6390
6054
6289
5735
6515
6134
4461

29755.39
2.12
12.38
0.11
32.70
23.34
0.03
0.02
0.10
32791.05
2.13
6.95
0.11
80.05
25.09
0.00
0.41
0.05
82765.15
2.36
13.69
0.08
58.68
26.78
0.01
0.10
0.03
74439.80
2.68
16.46
0.12
34.58
20.66
0.03
0.42
0.05
24641.13
1.55
17.45
0.05
34.97
18.62
0.00
0.52
0.03
24531.85
2.40
10.65
0.08
35.16
16.97
0.00
0.26
0.04
49482.48
3.41
11.28
0.12
56.42
16.59
0.00
0.69
0.04

2562.26
1.45
6.65
0.09
21.07
13.07
0.01
0.15
0.04
8441.96
1.85
2.19
0.10
43.47
18.83
0.00
0.47
0.03
16104.78
1.98
10.59
0.08
37.68
17.52
0.00
0.13
0.02
5447.86
1.68
10.33
0.09
10.40
8.92
0.02
0.51
0.04
6686.47
1.06
13.97
0.04
13.30
6.17
0.00
0.55
0.02
3214.40
0.99
6.55
0.06
10.80
12.35
0.00
0.24
0.02
11509.23
2.30
5.75
0.11
30.55
10.93
0.00
0.80
0.03

272
261
265
270
273
254
267
272
220
294
292
292
294
297
279
297
287
244
358
356
351
349
358
350
359
333
320
201
196
199
199
200
188
201
200
189
5629
5578
5588
5596
5624
5488
5629
5619
5292
1264
1211
1257
1257
1232
1210
1264
1231
1077
4667
4547
4294
4522
4622
4481
4645
4562
4101

Canada

France

Germany

Japan

U.K.

U.S.

1316

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Table 6
Differences in rm characteristics among repurchasing rms and dividend-paying rms. The table reports the signicance of the mean and median differences in
rm characteristics between three groups of rms that either pay dividends or repurchase shares or do both on the basis of t statistics and Wilcoxon rank-sum
approximate z statistics. Our dataset comprises rm-year observations for seven major countries over the period 19982006. Three groups of rm-years (B, C and
D) are compared to one another: (i) B (REPR = 0, DIVR N 0) includes rm-years in which a rm pays dividends but does not repurchase shares; (ii) C (REPR N 0,
DIVR = 0) includes rm-years in which a rm repurchases shares but does not pay dividends; and (iii) D (REPR N 0, DIVR N 0) includes rm-years in which a rm
repurchases shares and pays dividends. For example, Panel 1 tests the signicance of differences in rm characteristics between C and D. For a given rm
characteristic, + () indicates that the mean or median value for non-dividend-paying repurchasing rms (C) is greater (less) than the mean or median value for
dividend-paying repurchasing rms (B). *, ** and *** indicate two-tailed signicance at the 10%, 5% and 1% levels, respectively. The denitions of the rm
characteristic variables are provided in Table A1.
Country

Australia

Canada

France

Germany

Japan

U.K.

U.S.

Panel 1 Difference

Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
Log(TA)
MBR
CASH

Panel 2 Difference

Panel 3 Difference

C (REPRN 0, DIVR=0) D (REPRN 0, DIVRN 0)

C (REPRN 0, DIVR=0) B (REPR=0, DIVRN 0)

D (REPRN 0, DIVRN 0) B (REPR=0, DIVRN 0)

Mean Median t-stat

Mean Median t-stat

Mean Median t-stat

+
+

+
+

+
+

+
+

+
+

+
+

9.299
1.383
7.064
9.119
0.084
0.489
2.581
7.509
5.690
16.109
2.325
8.803
5.533
3.859
0.921
1.294
4.289
5.914
10.417
2.827
7.476
7.336
2.424
0.947
1.582
0.916
10.900
8.960
0.462
6.065
9.133
1.944

z-stat
8.541
2.005
5.535
7.452
5.239
1.531
2.814
8.779
7.441
13.757
0.933
6.212
5.690
7.684
2.924
0.343
9.688
9.766
9.380
0.276
5.830
6.028
6.465
1.732
0.835
6.776
8.962
8.694
1.745
5.584
8.737
4.520
2.437
5.501
11.232
7.756
10.766

0.881
3.199
7.293
9.689
11.399
10.841
0.108
4.238 5.920
22.720 22.806
17.947
13.190
4.775 9.732
1.021
1.218
27.361 28.924

15.578
18.151
11.523 11.044
1.748
4.780
8.619
3.381
8.206 13.752
1.442
5.226
2.026
4.170
1.364
1.777
7.164 13.042
8.801
4.975
51.017
46.469
1.418
8.494
32.665 28.263

+
+

+
+

+
+

+
+

+
+

+
+

+
+

8.802
0.438
10.285
12.708

z-stat
8.553
3.409
7.446
8.295
6.549
2.706

1.088
0.311
1.207
1.390
13.942 10.458

9.773
8.823
16.059 14.661
2.269
0.977
13.891
9.791
7.006 4.003
1.126
5.352
1.577
4.124
2.302
0.933
4.610 3.275
6.431
8.610
7.241 7.506
1.835
0.184
8.963
6.380
10.252 7.035
2.226
5.990
0.552
1.171
0.056
1.007
9.640 6.980
16.510
9.433
9.858 10.612
0.802
2.786
14.492
9.635
11.996 8.506
4.297 8.891
1.444
3.555
4.476 6.622
14.406 13.400
6.926
10.138
9.851 10.289
5.609 4.120
2.868 4.240
21.812 22.614
6.194
6.170
3.588 6.955
0.645
0.152
22.295 26.890

13.601
20.090
5.888 5.461
3.517 9.713
8.871
3.678
12.086 15.278
2.361
7.050
2.583 4.041
0.911
2.612
7.544 14.320
8.826
0.978
30.163
28.845
9.491 6.037
29.895 30.876

+
+

+
+

+
+
+

+
+

+
+

+
+
+
+
+

+
+

+
+
+
+
+

+
+
+

+
+
+
+
+
+

0
+

+
+
+

+
+

+
+

+
+

+
+
+
+
+

+
+
+

z-stat

6.185
2.130
1.695

4.772
2.248
3.480

0.659
2.072
1.655
4.186
1.193
2.694
5.863
0.944
1.602
2.125
4.435

0.324
1.768
2.566
3.537
1.026
3.332
4.957
0.431
3.329
4.112
4.000

0.374
0.615
4.508
0.951
8.562
2.288

1.009
1.453
8.062
3.237
7.801

0.026
2.127
0.680
1.024
3.170

0.229
0.621
1.770
2.059
1.866
4.186

0.968
0.031
1.667
0.217
4.809
4.666
3.738

1.473
0.484
1.005
0.837
4.530
4.552
5.096

0.102
1.222
0.212
0.472
1.258
3.868
0.218
5.621
2.159
2.619
8.760 12.197
2.976
3.668
2.512
0.792
16.631 15.761
1.552
6.150
0.657
3.144
4.845
4.536
6.081
7.037
12.359
12.152
4.076 9.344
1.569
0.145
1.547
5.506
2.017
2.749
1.816
0.099
0.841
2.079
1.092
4.640
5.280 12.567
15.232
14.615
9.549
15.356
2.006
7.734

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1317

Table 6 (continued)
Country

U.S.

Panel 1 Difference

ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL

Panel 2 Difference

Panel 3 Difference

C (REPRN 0, DIVR=0) D (REPRN 0, DIVRN 0)

C (REPRN 0, DIVR=0) B (REPR=0, DIVRN 0)

D (REPRN 0, DIVRN 0) B (REPR=0, DIVRN 0)

Mean Median t-stat

Mean Median t-stat

Mean Median t-stat

+
+

z-stat

17.029
21.888
2.419
19.936
1.936
9.852
3.368
4.254
22.664
50.397
17.376 35.640

10.909
12.003

z-stat

4.774
25.070
1.239
10.461
2.197
5.457
15.534
30.579
13.776 30.578

z-stat

15.691
19.572
10.415 10.023
4.272 2.438
0.941
1.269
9.979
18.183
3.643 1.712

differences between non-dividend-payers and dividend-payers (e.g., Chay and Suh, 2009; DeAngelo et al., 2006). What is
important for our investigation is their implication that non-dividend-payers and dividend-payers may be under different
circumstances when they decide to repurchase shares. For example, due to relatively low and unstable protability, non-dividendpayers may have little choice but to consider share repurchases, given that dividend payouts are long-term cash-ow
commitments. Therefore, when one analyzes factors that shape repurchase decisions, it is important to account for whether rms
pay dividends, instead of lumping all repurchasing rms together as if they are all the same.
We turn our attention to identifying rm characteristics that set repurchasing rms, C (REPR N 0, DIVR = 0) and D (REPR N 0,
DIVR N 0), apart from rms that only pay dividends, B (REPR = 0, DIVR N 0). Panel 2 of Table 6 reports that, in all countries, nondividend-paying repurchasing rms (C) are small (log(TA)), are less protable (ROA), have lower retained earnings (RE/TE) and
experience high prot variability (ROAVOL), as compared to rms that only pay dividends (B). Further, with the exception of
Japan, non-dividend-paying repurchasing rms (C) carry signicantly large cash holdings, as compared to rms that only pay
dividends (B).
Panel 3 of the same table reveals that, in almost all countries, dividend-paying repurchasing rms (D: REPR N 0, DIVR N 0) and
rms that only pay dividends (B: REPR = 0, DIVR N 0) are signicantly different in at least two characteristics: rm size (log(TA))
and cash holdings (CASH). With the only exception of Japan, both mean and median values of log(TA) for dividend-paying
repurchasing rms (D) are signicantly greater than those rms that only pay dividends (B). Similarly, in all countries except for
the U.K., both mean and median values of CASH for dividend-paying repurchasing rms (D) are signicantly greater than those for
rms that only pay dividends (B). In sum, among dividend-paying rms, there is a tendency for repurchasing rms (D) to be large
in size and to have large cash holdings in comparison to non-repurchasing rms (B). 7
The results from Panels 2 and 3 suggest that, across countries, both groups of repurchasing rms, C (REPR N 0, DIVR = 0) and D
(REPR N 0, DIVR N 0), tend to have one common characteristic, large cash holdings, that sets them apart from rms that only pay
dividends, B (REPR = 0, DIVR N 0). This observation suggests that large cash holdings may be a key factor that is associated with
share repurchase decisions.

4.4. Tobit regressions of the amount of share repurchases


Our next analysis seeks to identify rm characteristics that are signicantly associated with the amount of share repurchases in
order to evaluate the validity of extant repurchase hypotheses. For each country in our sample, we estimate a Tobit regression
model wherein the dependent variable is the amount of share repurchases (REPR). The explanatory variables include the nine rm
characteristics described above plus lagged dividend (DIVR_L). DIVR_L is used to control for the amount of dividends paid in the
previous year.
Table 7 reports the results of Tobit regressions over the period 19982006. Column (1) provides results for all sample rmyears in each country. Additionally, we also estimate our Tobit regression model separately for two groups of rm-years: (i) rmyears in which rms pay dividends (Column (2)) and (ii) rm-years in which rms do not pay dividend (Column (3)).
Among the hypotheses we consider, the results lend support to the excess capital hypothesis. When the regression includes all
rm-years in Column (1), cash holdingsour proxy for excess capitalenter signicantly with the predicted positive sign in all
countries. The signicantly positive effect of cash holdings on the amount of repurchases persists even when we restrict attention
to only dividend-payers or to only non-dividend-payers; in both Columns (2) and (3), the coefcient for cash holdings is positive
and signicant in all countries.
The other hypotheses we consider do not fare as well. First, in Column (1), the sign of the coefcient for MBR is not consistent
across countriesit is positive for the U.S., but negative or insignicant for many other countriesnor is the sign of the coefcient
for SRET consistent across countries. Thus, there is little evidence that undervaluation leads to more share repurchase activities.
Second, in Column (1), the sign of the coefcient for NOPER is negative in many countries. Thus, unlike the U.S. studies of
Jagannathan et al. (2000) and Dittmar (2000), we do not nd a consistently positive coefcient for NOPER. If we view NOPER as a

7
These ndings are at odds with Grullon and Michaely (2002), who argue that conditioning on a rm paying dividends, there is no difference between rms
that do or do not repurchase shares.

1318

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Table 7
Tobit regressions for the amount of repurchases. This table reports the results of Tobit regressions. Our dataset comprises rm-year observations from seven major
countries over the period 19982006. The dependent variable is the percent amount of repurchases scaled by total assets (i.e., REPR 100). The denitions of the
explanatory variables are provided in Table A1 except for DIVR_L. DIVR_L is the lagged value of DIVR (i.e., previous year's dividend-to-total assets ratio). Column
(1) analyzes all rm-years; Column (2) analyzes rm-years in which rms pay dividends; and Column (3) analyzes rm-years in which rms do not pay
dividends. Year dummies are used to control for year xed effects. *, ** and *** indicate signicance of 2 test at the 10%, 5% and 1% levels, respectively. The
numbers in parentheses are 2 statistics. -2Log is 2 times log likelihood ratio.
Country

Australia

Canada

France

Germany

Japan

Variable

Intercept
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
DIVR_L
2Log
N
Intercept
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
DIVR_L
2Log
N
Intercept
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
DIVR_L
2Log
N
Intercept
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
DIVR_L
2Log
N
Intercept
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL

(2) Firms with DIVR N 0

(1) All Firms

(3) Firms with DIVR = 0

Coeff.

stat.

Coeff.

stat.

Coeff.

2 stat.

34.74
1.29
0.25
8.63
7.80
3.02

(60.99)
(34.80)
(2.04)
(14.75)
(10.43)
(7.59)
(1.62)
(2.32)
(0.25)
(0.12)
(1.04)

36.42
1.39
0.16
9.30
13.46
3.18

(53.17)
(33.55)
(0.71)
(9.66)
(11.05)
(6.09)
(0.02)
(4.16)
(8.92)
(8.63)
(4.16)

18.32
0.20
0.27
7.50

(1.82)
(0.07)
(0.43)
(3.61)
(1.77)
(0.20)
(2.51)
(7.49)
(0.64)
(0.02)
(0.70)

0.61
4.44
0.03
0.07
6.85
1238.6
1756
18.70
0.71
0.01
5.11
7.71
0.17
0.24
4.28
0.38
1.29
17.03
1580.2
1481
15.82
0.61
0.07
8.00
7.07
0.03
0.05
8.52
0.09
5.41
4.08
1381.4
1785
14.24
0.42
0.07
7.49
4.85
0.98
0.33
4.16
0.13
0.60
3.37
1087.5
1997
1.28
0.04
0.01
2.35
1.16
0.05
0.06
1.13
0.03
0.67

(57.32)
(36.28)
(0.02)
(21.14)
(24.73)
(3.65)
(1.32)
(0.83)
(5.23)
(0.72)
(14.71)

(70.24)
(50.98)
(2.08)
(36.08)
(10.93)
(0.14)
(0.35)
(7.77)
(0.57)
(6.74)
(0.31)

(47.82)
(20.77)
(1.20)
(45.39)
(11.71)
(11.45)
(1.72)
(2.82)
(1.27)
(0.21)
(0.78)

(16.16)
(5.88)
(1.42)
(174.11)
(15.06)
(20.33)
(3.16)
(1.98)
(11.26)
(5.09)

0.08
9.80
1.49
7.01
15.46
991.3
1172
18.46
0.76
0.51
7.39
6.44
0.32
0.57
5.59
0.53
6.56

19.07
886.8
668
14.76
0.58
0.10
2.96
7.91
0.01
0.14
9.66
0.17
13.81
4.15
1123.4
1287
14.85
0.49
0.01
7.06
10.76
1.28
0.03
8.72
0.46
0.16
13.10
777.9
1267
1.98
0.07
0.02
1.91
1.63
0.23
0.04
0.09
0.01
5.13

(30.70)
(24.43)
(7.12)
(11.77)
(4.62)
(1.92)
(1.48)
(0.16)
(1.25)
(5.93)
(10.87)

(52.59)
(42.35)
(1.25)
(3.28)
(6.14)
(0.01)
(0.23)
(2.69)
(1.35)
(8.16)
(0.29)

(40.50)
(21.33)
(0.02)
(19.52)
(16.25)
(12.34)
(0.01)
(8.86)
(1.48)
(0.11)
(5.15)

(31.19)
(19.29)
(2.07)
(98.53)
(13.39)
(59.29)
(1.44)
(0.01)
(0.02)
(45.59)

4.97
0.73
1.35
12.43
0.24
0.13
59.91
205.8
584
13.51
0.40
0.13
5.40
9.32
0.14
0.52
4.85
0.32
4.38
1.32
668.2
813
14.27
0.42
0.03
18.41
3.56
0.03
0.19
11.51
0.77
3.75
12.09
222.1
498
4.54
0.13
0.05
7.92
1.73
0.36
0.94
3.48
0.25
1.18
4.00
294.6
730
1.03
0.10
0.03
2.70
0.67
0.00
0.04
1.45
0.03
0.21

(8.75)
(2.84)
(2.68)
(15.98)
(19.27)
(1.61)
(3.45)
(0.33)
(2.88)
(3.68)
(0.01)

(3.69)
(1.24)
(0.12)
(34.25)
(0.63)
(0.01)
(0.66)
(3.90)
(1.08)
(1.29)
(0.09)

(0.81)
(0.25)
(0.15)
(21.38)
(0.96)
(0.84)
(4.58)
(0.34)
(2.21)
(0.43)
(0.41)

(1.06)
(4.24)
(10.81)
(25.49)
(2.11)
(0.02)
(0.19)
(1.68)
(6.60)
(0.45)

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1319

Table 7 (continued)
Country

Japan

U.K.

U.S.

Variable

DIVR_L
2Log
N
Intercept
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
DIVR_L
2Log
N
Intercept
Log(TA)
MBR
CASH
ROA
LEVER
SRET
NOPER
RE/TE
ROAVOL
DIVR_L
2Log
N

(2) Firms with DIVR N 0

(1) All Firms

(3) Firms with DIVR = 0

Coeff.

stat.

Coeff.

stat.

Coeff.

2 stat.

15.56
13393.2
9633
24.16
1.03
0.01
2.15
10.00
0.88
1.09
9.66

(41.09)

10.84
12096.8
8446
17.86
0.79
0.05
2.78
5.08
0.97
1.19

(17.88)

9.84
1189.2
1187
38.70
1.79
1.85
7.98
21.99
2.51

(0.15)

0.01
2.31
0.36
5692.6
5857
20.55
0.91
0.00
4.96
10.74
0.01
0.00
3.77
0.03
0.45
9.38
30392.3
17997

(200.51)
(152.44)
(0.10)
(4.34)
(46.10)
(19.03)
(14.25)
(8.92)
(0.03)
(6.19)
(2.35)

(910.80)
(817.35)
(3.96)
(261.71)
(826.30)
(9.12)
(13.41)
(5.06)
(9.11)
(5.69)
(12.59)

6.20
0.57
11.71
0.41
4726.8
4247
14.35
0.62
0.03
5.55
27.63
0.06
0.53
14.93
0.02
2.12
26.58
12963.4
6125

(96.21)
(82.23)
(2.24)
(4.38)
(5.71)
(22.77)
(11.91)
(1.99)
(10.51)
(24.98)
(3.26)

(218.58)
(211.07)
(10.64)
(86.02)
(2121.16)
(3.65)
(11.45)
(17.28)
(0.07)
(1.80)
(104.68)

0.49
19.96
0.03
0.02
115.63
893.8
1610
23.98
1.02
0.00
4.71
8.94
0.01
0.00
1.23
0.02
0.53
15.06
17032.1
11872

(40.73)
(31.76)
(18.94)
(12.82)
(25.96)
(8.55)
(0.48)
(8.05)
(0.04)
(0.01)
(3.44)

(535.63)
(415.32)
(0.02)
(142.87)
(407.37)
(4.22)
(5.91)
(0.36)
(4.07)
(5.21)
(0.45)

proxy for temporary cash ows, this nding does not provide support for the hypothesis that rms use repurchases to distribute
temporary cash ows. However, as we noted earlier, temporary cash ows can arise from sources other than non-operating
income and thus the absence of a positive effect of non-operating income on repurchases does not necessarily mean rejection of
the temporary cash ow hypothesis. Third, in Column (1), the coefcient for LEVER is signicantly negative in several countries
but positive or insignicant in others, so the evidence for the hypothesis that rms with low leverage make large repurchases is
weak.
Table 7 also shows that the determinants of share repurchases may differ between dividend-payers and non-dividend-payers.
In Column (2), we nd that, among dividend-paying rms, rm size (log(TA)) and protability (ROA) have signicantly positive
effects on the amount of share repurchases in all sample countries without exception. However, as Column (3) shows, the
signicance of the coefcients for these two characteristics disappears in many countries for non-dividend-payers; Canada, the
U.K. and the U.S. are the only countries in which both rm size and protability enter with signicantly positive coefcients. Thus,
it appears that rm size and protability affect share repurchase decisions for dividend-payers, but not necessarily for nondividend-payers.
In summary, across countries, cash holdings have a signicantly positive effect on the amount of repurchases for both dividendpayers and non-dividend-payers, but other rm characteristics are not consistently associated with the amount of repurchases.
Note that our earlier results also showed that large cash holdings are a key rm characteristic of share repurchasing rms.
Therefore, overall our results point to large cash holdings as a key determinant of share repurchases across countries.
4.5. Excess cash and share repurchases
Although our results so far indicate that share repurchases are signicantly associated with large cash holdings, this
observation does not lend sufcient support for the excess capital hypothesis, particularly because large cash holdings are not the
same thing as excess cash. Our next analysis examines whether large cash holdings held by repurchasing rms represent excess
cash based on the regression model of Opler et al. (1999).
Excess cash is dened as the amount of cash holdings in excess of optimal levels. The rst step in our analysis is to estimate the
amount of optimal cash for each rm following the model of Opler et al. (1999). The dependent variable in this regression model is
the logarithm of cash holdings divided by net assets, where net assets are dened as total assets less cash holdings. The
explanatory variables are rm size, book-to-market ratio, cash ow, net working capital, capital spending, leverage, and operating
prot volatility. Cash ow, net working capital and capital spending are scaled by net assets. These explanatory variables are
identical to the set of explanatory variables used by Opler et al. (1999), except for R&D spending; we do not include R&D spending

1320

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Table 8
Excess cash by payout policy. The table reports the mean and median values of excess cash for four groups of rms over the period 19982006 for seven major
countries. The amount of excess cash is estimated using a regression model similar to the one developed by Opler et al. (1999). The dependent variable in the
regression is the logarithm of cash holdings divided by net assets, where net assets are dened as total assets less cash holdings. Cash holdings are cash plus shortterm investments at the beginning of the scal year. The explanatory variables are the logarithm of total assets; the book-to-market ratio dened as (book value of
total assets book value of equity + market value of equity)/total assets); the cash-ow-to-net-assets ratio, where cash ow is dened as earnings before
interests and taxes + depreciation and amortization interest, taxes, and common dividends; the net-working-capital-to-net-assets ratio, where net working
capital is calculated without cash holdings; the capital-expenditures-to-net-assets ratio, the total-liabilities-to-net-assets ratio; and the standard deviation of
operating income/total assets over the most recent four years. We drop rms for which the cash-to-net-assets ratio is greater than one. This regression model is
estimated for each individual year for a given country. Excess cash is calculated by taking the antilog of the residual of the estimated regression model. To deal
with extreme values, we Winsorize excess cash at the bottom and top two percent of distribution for a given country. In a given year, rms in each country are
divided into four categories according to their payout policy: (A) a policy of distributing nothing (REPR = 0, DIVR = 0); (B) a policy of distributing cash only
through dividends (REPR = 0, DIVR N 0); (C) a policy of distributing cash only through share repurchases (REPR N 0, DIVR = 0); and (D) a policy of distributing cash
through both share repurchases and dividends (REPR N 0, DIVR N 0). t and z statistics test whether the mean and median values of excess cash for a given group of
repurchasing rms (Groups (C) and (D)) are signicantly greater than the corresponding values of excess cash for their matching comparison rms (Groups (A)
and (B), respectively).

Country

Payout Policy Type

Excess Cash
N

Australia

Canada

France

Germany

Japan

U.K.

U.S.

All

Mean

Median

(A)REPR=0,DIVR=0
(C)REPR>0,DIVR=0
(B)REPR=0,DIVR>0
(D)REPR>0,DIVR>0

346
29
657
147

12.09%
24.18%
6.09%
7.35%

[0.95%]
[12.14%]
[0.42%]
[1.79%]

(A)REPR=0,DIVR=0
(C)REPR>0,DIVR=0
(B)REPR=0,DIVR>0
(D)REPR>0,DIVR>0

460
92
271
150

13.91%
14.93%
6.54%
4.66%

[1.83%]
[3.38%]
[-0.02%]
[1.66%]

(A)REPR=0,DIVR=0
(C)REPR>0,DIVR=0
(B)REPR=0,DIVR>0
(D)REPR>0,DIVR>0

449
40
873
255

4.84%
21.40%
6.13%
4.37%

[-0.34%]
[11.61%]
[0.91%]
[0.51%]

(A)REPR=0,DIVR=0
(C)REPR>0,DIVR=0
(B)REPR=0,DIVR>0
(D)REPR>0,DIVR>0

529
55
959
160

8.10%
19.85%
5.47%
9.13%

[-0.18%]
[10.76%]
[1.25%]
[2.21%]

(A)REPR=0,DIVR=0
(C)REPR>0,DIVR=0
(B)REPR=0,DIVR>0
(D)REPR>0,DIVR>0

661
434
2783
4636

2.46%
3.57%
3.64%
6.43%

[-0.19%]
[-0.40%]
[-0.74%]
[1.28%]

(A)REPR=0,DIVR=0
(C)REPR>0,DIVR=0
(B)REPR=0,DIVR>0
(D)REPR>0,DIVR>0

952
54
2110
533

17.05%
22.38%
9.12%
9.72%

[2.97%]
[8.10%]
[1.78%]
[3.91%]

(A)REPR=0,DIVR=0
(C)REPR>0,DIVR=0
(B)REPR=0,DIVR>0
(D)REPR>0,DIVR>0

7002
3126
2108
3156

18.43%
20.44%
7.76%
8.94%

[2.02%]
[5.11%]
[-0.70%]
[1.26%]

(A)REPR=0,DIVR=0
(C)REPR>0,DIVR=0
(B)REPR=0,DIVR>0
(D)REPR>0,DIVR>0

10399
3830
9761
9037

15.77%
18.45%
6.36%
7.47%

[1.28%]
[4.23%]
[0.18%]
[1.44%]

t stat

p-value

z stat

p-value

2.264

(0.024)

2.793

(0.005)

0.802

(0.423)

2.587

(0.010)

0.300

(0.764)

0.161

(0.872)

-1.238

(0.216)

2.030

(0.042)

5.933

(0.000)

4.494

(0.000)

-1.591

(0.112)

-0.859

(0.390)

3.703

(0.000)

3.857

(0.000)

2.795

(0.005)

2.537

(0.011)

1.509

(0.132)

-0.640

(0.522)

7.074

(0.000)

7.146

(0.000)

1.192

(0.233)

1.760

(0.078)

0.613

(0.540)

2.935

(0.003)

2.773

(0.006)

6.059

(0.000)

2.023

(0.043)

8.469

(0.000)

4.497

(0.000)

6.899

(0.000)

4.172

(0.000)

7.465

(0.000)

because this variable is generally unavailable for rms outside the U.S. in the Worldscope database. We estimate this regression
model for each individual year for a given country. 8 Once the regression model is estimated, we calculate excess cash by taking the
antilog of the residual of the regression model.
Table 8 reports the mean and median values of excess cash for four groups of rms classied by payout policy for the
seven countries in our sample. Our key question is whether repurchasing rms carry relatively large amounts of excess cash.

8
We also estimate this regression model by pooling all rm-year observations for a given country with year dummies. This alternative estimation approach
yields results similar to those reported in Table 8.

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1321

Given that the circumstances under which rms make repurchase decisions may differ depending on whether they are
dividend-payers, we make two sets of analyses for non-dividend-payers and dividend-payers. The table shows that, for both
non-dividend-payers and dividend-payers, repurchasing rms tend to hold greater amounts of excess cash than do nonrepurchasing rms.
To elaborate, when we focus our attention on non-dividend-payers, the mean value of excess cash is greater for repurchasing
rms (C: REPR N 0, DIVR = 0) than it is for non-repurchasing rms (A: REPR = 0, DIVR = 0) in all seven countries. Similarly, when
we focus our attention on dividend-payers, the mean value of excess cash is greater for repurchasing rms (D: REPR N 0, DIVR N 0)
than non-repurchasing rms (B: REPR = 0, DIVR N 0) with the exceptions of Canada and France. When we combine all rm-years
from the seven countries, as reported in the bottom rows of Table 8, the mean excess cash for non-dividend-paying repurchasers
(C) is signicantly greater at 18.45% than that for non-dividend-paying non-repurchasers (A) at 15.77%, and, similarly, the mean
excess cash for dividend-paying repurchasing rms (D) is signicantly greater at 7.47% than that for dividend-paying nonrepurchasers (B) at 6.36%. This pattern of repurchasing rms carrying relatively large amounts of excess cash is conrmed in
comparisons of median values. For example, the bottom rows of Table 8 report that, among non-dividend-payers, the median
excess cash for repurchasing rms (C) is signicantly greater at 4.23% than it is for non-repurchasing rms (A) at 1.28%. Similarly,
among dividend-payers, the median excess cash for repurchasing rms (D) is signicantly greater at 1.44% than it is for nonrepurchasing rms at 0.18%.

4.6. Changes in cash holdings in the years preceding share repurchases


This section analyzes changes in cash holdings over a ve-year period prior to share repurchases in order to delve further into
the nature of large cash holdings held by repurchasing rms. This analysis helps us to determine whether there is a causal relation
between cash holdings and repurchases. In performing this analysis, we divide repurchasing rms into two groups, depending on
whether or not they pay dividends.
We rst examine the changes in cash holdings for non-dividend-paying repurchasing rms (C: REPR N 0, DIVR = 0). We
restrict our attention to rms that repurchase shares in year 0, but do not repurchase shares in any year from year 4 through
year 1 and that do not pay dividends in any year from year 4 through year 0. There are 1,688 such rms from the
seven countries under study over the period 19982006. The comparison group is comprised of rms that make no payouts
(A: REPR = 0, DIVR = 0) in any year from year 4 through 0. We set the level of cash holdings (i.e., cash scaled by total assets) to
100 at the beginning of the ve-year period (i.e., year 4) for each rm, in order to standardize cash holdings that may differ
across rms. Fig. 1 documents that non-dividend-paying repurchasing rms experience a substantial increase in cash holdings
prior to their repurchases. The median value of cash holdings rises by approximately 12% (from 100 to 111.79) from year 4

Fig. 1. Cash holdings of non-dividend-paying repurchasing rms (C: REPR N 0, DIVR = 0). The solid line () plots the median value of relative cash holdings for rmyears in which rms repurchase shares but do not pay dividends (C: REPR N 0, DIVR = 0) for a ve-year period from year 4 through year 0. Year 0 is the event year
in which a rm repurchases shares. Cash holdings at year 0 represent the year-end cash holdings (scaled by book assets). For comparison, the dashed line () plots
the median value of relative cash holdings for no-payout rm-years (A: REPR = 0, DIVR = 0). To elaborate, in this graph, repurchasing rm-years () are those in
which rms repurchase shares in year 0 but do not repurchase in any year from year 4 through year 1, and do not pay dividends in any year from year 4
through year 0. No-payout rm-years () are those in which rms do not make any payouts in any year from year 4 through year 0. We set the level of cash
holdings (i.e., cash scaled by total assets) to 100 at the beginning of the ve-year period (i.e., year 4), in order to standardize across rms that may have different
levels of cash holdings. Thus, relative cash holdings in each year are the level of cash holdings in that year relative to the beginning-of-the-ve-year level. Over the
sample period 19982006, there are a total of 1,688 non-dividend-paying repurchasing rm-years and 16,006 no-payout rm-years from the seven major
countries. For each sample country, the numbers of non-dividend-paying repurchasing rm-years and no-payout rm-years are 21 and 702 in Australia; 55 and
794 in Canada; 8 and 150 in France; 13 and 331 in Germany; 2 and 313 in Japan; 57 and 1146 in the U.K.; and 1532 and 12,570 in the U.S., respectively.

1322

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Fig. 2. Cash holdings of dividend-paying repurchasing rms (D: REPR N 0, DIVR N 0). The solid line () plots the median value of relative cash holdings for rm-years
in which rms repurchase shares and pay dividends (D: REPR N 0, DIVR N 0) for a ve-year period from year 4 through year 0. Year 0 is the event year in which a
rm repurchases shares. Cash holdings at year 0 represent year-end cash holdings (scaled by book assets). For comparison, the dashed line ()) plots the median
value of relative cash holdings for dividend-paying rm-years in which rms do not repurchase shares (B: REPR = 0, DIVR N 0). To elaborate, in this graph,
repurchasing rm-years () are those in which rms repurchase shares in year 0 but do not repurchase in any year from year 4 through year 1, and pay
dividends in every year from year 4 through year 0. Dividend-paying rm-years () are those in which rms pay dividends in every year from year 4 through
year 0, but do not repurchase shares in any year from year 4 through year 0. We set the level of cash holdings (i.e., cash scaled by total assets) to 100 at the
beginning of the ve-year period (i.e., year 4), in order to standardize across rms that may have different levels of cash holdings. Thus, relative cash holdings in
each year are the level of cash holdings in that year relative to the-beginning-of-the-ve-year level. Over the sample period 19982006, there are a total of 1117
dividend-paying repurchasing rm-years and 8243 rm-years that only pay dividends. For each sample country, the numbers of dividend-paying repurchasing
rm-years and only-dividend-paying rm-years are 63 and 754 in Australia; 43 and 285 in Canada; 69 and 495 in France; 33 and 601 in Germany; 271 and 1,791 in
Japan; 351 and 2,664 in the U.K.; and 347 and 1,653 in the U.S., respectively.

through year 0. The graph shows that the comparison group of rms that make no payouts also experiences an increase in
cash holdings over the same ve-year period, but the magnitude of the increase in their cash holdings is relatively small
approximately 4.4% (from 100 to 104.40).
We turn next to dividend-paying repurchasing rms (D: REPR N 0, DIVR N 0). Specically, we choose rms that repurchase
shares in year 0, but do not repurchase shares in any year from year 4 through year 1, and that pay dividends in every year
from year 4 through year 0. Changes in cash holdings of these repurchasing rms are compared to those rms that only pay
dividends (B: REPR = 0, DIVR N 0); this comparison group is comprised of rms that do not repurchase shares in any year from year
4 through year 0, but that pay dividends in every year from year 4 through 0. Fig. 2 illustrates that dividend-paying
repurchasing rms experience an increase in cash holdings in the years preceding their repurchases. Over the ve-year period,
their median cash holdings increase by approximately 3% (from 100 to 103.05). In contrast, the median cash holdings of the
comparison rms drop by slightly more than 6% (from 100 to 93.66) from year 4 through 0.
Overall, our ndings show that both groups of repurchasing rms experience an increase in cash holdings in the years
preceding their repurchases. These ndings give an indication that the accumulation of cash may prompt rms to repurchase
shares. However, it is also possible that the accumulation of cash leads rms to increase dividends, rather than to repurchase
shares. 9 We explore whether dividend-increasing rms experience an increase in cash holdings before their decision to
increase dividends. We choose rms that increase dividends either substantially or routinely, and analyze the variation of their
cash holdings. Following Guay and Harford (2000), we dene a substantial dividend increase as one that is greater than the
previous year's dividend change. A routine dividend increase is dened as one that is not substantial. Fig. 3 documents that the
dividend-increasing rms experience only a slight change or a decline in their median cash holdings in the years preceding
dividend increases. For those rms that make substantial dividend increases, the median value of cash holdings at the end of the
ve-year period is about the same as their beginning-of-the-ve-year-period levels (from 100 to 99.26). For those rms that
make routine dividend increases, the median value of cash holdings drops by approximately 5% (from 100 to 94.70) over the
sample period.
In summary, it appears that repurchasing rms experience an increase in cash holdings in the years preceding their
repurchases, while rms that increase dividends do not experience a similar increase in cash holdings. These ndings add to the
evidence that large cash holdings are a key determinant of share repurchases.

9
The direction of this inquiry is in accordance with the focus of several studies that compare factors affecting the decision to repurchase shares vs. the decision
to increase dividends (see, e.g., Jagannathan et al., 2000; Guay and Harford, 2000).

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1323

Fig. 3. Cash holdings of dividend-increasing rms. The graph plots the median value of relative cash holdings for two types of dividend-increasing rm-years for a
ve-year period from year 4 through year 0. The solid line () represents those rm-years in which rms increase dividend substantially in year 0 (i.e., a rm's
dividend increase in year 0 is greater than the increase in year 1). The dotted line (*) represents those rm-years in which rms make a routine increase in
dividend payouts in year 0. A routine increase in dividends is an increase that is not substantial. Year 0 is the event year in which a rm increases dividends, either
substantially or routinely. Dividend-initiations are not included in this analysis. Cash holdings at year 0 represent the beginning-of-the-year cash holdings (scaled
by book assets) before cash distributions are made during that year. We set the level of cash holdings (i.e., cash scaled by total assets) to 100 at the beginning of the
ve-year period (i.e., year 4), in order to standardize across rms that may have different levels of cash holdings. Thus, relative cash holdings in each year are the
level of cash holdings in that year relative to the-beginning-of-the-ve-year level. Over the sample period 19982006, there are a total of 7727 rm-years that
make a substantial increase in dividend payouts and 3746 rm-years that make a routine increase in dividend payouts for the seven sample countries. For each
sample country, the numbers of substantial-dividend increasing and routine-dividend-increasing rm-years are 350 and 211 in Australia; 203 and 110 in Canada;
494 and 267 in France; 386 and 180 in Germany; 2433 and 819 in Japan; 1,590 and 911 in the U.K.; and 2271 and 1248 in the U.S., respectively.

4.7. The source of large cash holdings for repurchasing rms


Our nal analysis seeks to identify the source of increases in cash holdings prior to share repurchases by examining changes in
three variablesoperating protability (ROA), cash ows from operating activities scaled by total assets (CFO) and cash ows from
investing activities scaled by total assets (CFI)in the years surrounding share repurchases. The rst two variables, ROA and CFO,
are chosen in order to determine whether large cash holdings for repurchasing rms arise from operational improvements,
whereas CFI is chosen in order to examine whether those holdings arise from the investment side of rms' activities. In this
analysis, we focus on rms that initiate share repurchases by excluding rms that continue to repurchase shares year after year.
Specically, this analysis examines rm-years in which rms repurchase shares in year 0 but not in year 1. To save space, we
report results for a combined sample of dividend-paying and non-dividend-paying repurchasing rms. When we perform the
same analysis separately for the two groups of repurchasing rms, the results (provided in the Appendix A) are qualitatively
similar to those for the combined sample as presented in Table 9.
The rst panel of Table 9, which reports the mean and median values for changes in ROA for repurchasing rms in the years
before and after share repurchases over the sample period 19982006, reveals that share repurchases are not preceded by
improved ROA. For both the two-year and one-year periods before share repurchases (i.e., Columns (2, 0) and (1, 0)), there is
no country for which the mean and median ROA changes are signicantly positive. In addition, for the two-year and one-year
periods after share repurchases (i.e., Columns (0, +2) and (0, + 1)), the mean and median ROA changes are either negative or
insignicant for all countries except Japan. Similarly, as the second panel of Table 9 shows, CFO does not appear to improve either
before or after share repurchases. In most countries, the mean and median values for changes in CFO are either negative or
insignicant in the years before and after share repurchases.
Overall, share repurchases are not associated with improvements in operating performance before or after share repurchases.
This observation corroborates Grullon and Michaely (2004) who reject the cash-ow-signaling hypothesis by documenting that
the announcements of share repurchase programs in the U.S. are not accompanied by improvements in operating performance.
More importantly for our research purpose, this observation suggests that large cash holdings for share repurchasing rms are
unlikely to arise from operational improvements. 10
Next we examine the possibility that the source of large cash holdings for share repurchases is the investment side of rms'
activities. The third panel of Table 9 documents that CFI tends to increase in the years leading up to share repurchases. For
example, in Australia, CFI increases by more than 6 and 3 percentage points in terms of mean and median, respectively, over the

10
We also examine whether changes in non-operating income (NOPER) are responsible for the increase in cash holdings prior to share repurchases. However,
changes in NOPER prior to share repurchases are either negative or statistically insignicant across countries.

1324

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Table 9
Changes in ROA, CFO and CFI associated with repurchases. The table reports the mean and median values for changes in three variables, ROA, CFO and CFI, in the
years before and after share repurchases over the period 19982006. In this analysis, repurchasing rms are rm-years in which rms initiate share repurchases in
year 0 (that is, these rms repurchase shares in year 0 but not in year 1). Panels 1, 2 and 3 report on changes in ROA (earnings before interests and taxes divided
by total assets), CFO (cash ows from operating activities divided by total assets) and CFI (cash ows from investing activities divided by total assets), respectively.
Column ( 2, 0) is the change in a given variable from year 2 through year 0. Other columns are similarly dened. For a given variable, we drop observations for
which the change in the variable is greater than 100% or lower than 100%. We calculate the mean and median changes by using observations that have been
Winsorized at the 1st and the 99th percentiles. The signicance levels of the means (medians) are based on a two-tailed t-test (two-tailed Wilcoxon rank test). *, **
and *** indicate two-tailed signicance at the 10%, 5% and 1% levels, respectively. Mean and median values are expressed in percentages.
( 2, 0)
1. Operating protability (ROA)
Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N
Germany
Mean
Median
N
Japan
Mean
Median
N
UK
Mean
Median
N
US
Mean
Median
N
2. CF from operating activities (CFO)
Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N
Germany
Mean
Median
N
Japan
Mean
Median
N
UK
Mean
Median
N
US
Mean
Median
N
3. CF from investing activities (CFI)
Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N
Germany
Mean
Median
N
Japan
Mean
Median
N

0.527
0.091
95
0.438
0.237
105
1.845
0.244
65
0.034
1.032
85
0.946
0.407
710
1.447
0.540
402
0.124
0.317
1793

0.141
0.943
100
0.165
1.498
112
0.341
0.830
68
1.505
0.628
88
0.179
0.139
576
0.115
0.078
407
1.157
0.455
1999

6.166
3.510
102
6.070
2.480
108
2.914
1.317
67
4.236
0.975
85
0.983
0.441
574

( 1, 0)
0.777
0.546
133
0.378
0.834
152
0.681
0.123
112
1.174
0.697
104
0.368
0.018
868
0.598
0.193
519
0.883
0.223
2294

0.809
0.274
136
0.753
0.381
162
1.861
0.666
120
1.515
0.558
110
0.349
0.207
873
0.289
0.018
528
0.133
0.198
2549

2.265
1.592
137
3.416
1.044
158
0.485
0.073
120
0.317
0.695
106
0.004
0.084
873

(0, + 1)
0.160
1.194
145
1.531
0.491
161
0.043
0.055
110
0.234
0.014
104
0.212
0.448
870
0.955
0.099
532
0.639
0.051
2351

0.107
0.040
149
0.866
0.309
175
0.167
0.190
115
0.258
0.087
111
0.005
0.172
872
0.293
0.333
536
0.755
0.362
2613

1.454
0.551
148
0.749
0.722
170
0.766
0.179
114
0.663
0.046
111
0.060
0.025
872

(0, + 2)
2.091
0.558
120
1.435
0.575
139
2.103
0.244
65
0.185
0.461
90
1.034
1.052
735
0.473
0.200
432
0.871
0.367
1970

1.439
0.075
127
1.037
0.289
149
0.056
0.027
68
0.470
0.896
96
0.195
0.390
744
0.788
0.335
435
1.127
0.704
2218

1.049
1.611
124
0.847
0.908
144
2.254
1.319
67
1.972
1.795
95
0.080
0.007
743

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1325

Table 9 (continued)

UK

US

Mean
Median
N
Mean
Median
N

( 2, 0)

( 1, 0)

(0, + 1)

(0, + 2)

4.508
1.427
401
2.969
1.183
1944

3.147
1.376
523
2.163
0.576
2481

0.855
0.142
530
0.941
0.229
2573

0.315
0.608
430
2.041
0.664
2192

two year window (2, 0). This increase in CFI over ( 2, 0) is signicantly positive in all countries. Assuming that capital
expenditures are the largest component of CFI, a decrease in capital expenditures results in an increase in CFI. When we examine
changes in capital expenditures in the years before and after share repurchases (in unreported results), we indeed nd that
repurchasing rms decrease capital expenditures substantially over (2, 0). Therefore, it appears that, across countries, rms
tend to reduce capital expenditures considerably prior to share repurchases, which suggests that the substantial increase in cash
holdings prior to share repurchases arises from reductions in capital expenditures.
In summary, our international investigation reveals that share repurchases are associated with reductions in capital
expenditures but not with improvements in operating performance. Combined with our earlier ndings, our evidence indicates
that the primary source of large cash holdings for repurchasing rms (or substantial increases in cash holdings prior to share
repurchases) is reductions in capital expenditures. Assuming that reductions in capital expenditures indicate declining investment
opportunities, our ndings are consistent with the free cash ow hypothesis, which states that rms use share repurchases to
reduce the amount of free cash ows at managements' disposal and thereby mitigate the potential overinvestment problem
(Jensen, 1986).

5. Concluding remarks
Our international investigation reveals several important share repurchase behaviors that are common for both U.S. and nonU.S. rms. Our most important nding is that large cash holdings are signicantly associated with the amount of share repurchases
across countries. We conduct in-depth analyses of the role and nature of the cash holdings that prompt rms to repurchase shares.
We nd that, across countries, (1) repurchasing rms hold relatively large amounts of excess cash, which indicates that large cash
holdings held by repurchasing rms represent excess cash; (2) repurchasing rms experience substantial increases in cash
holdings prior to repurchases; and (3) the increases in cash holdings prior to share repurchases appear to be obtained from
reductions in capital expenditure, rather than from improvements in operating performance.
Our ndings are supportive of two hypotheses: (i) the excess capital hypothesis (or the free-cash-ow hypothesis) and (ii)
the temporary cash ow hypothesis. To elaborate, our ndings indicate that rms distribute excess capital through repurchases
and thereby resolve potential overinvestment problems. This reasoning is based on two observations: rst, much of the cash
held by repurchasing rms represents excess cash and, second, repurchasing rms experience declines in capital expenditures
(i.e., investment opportunities) prior to share repurchases. In order to explain why rms choose repurchases instead of
dividends to distribute excess capital, we point to the observation that share repurchases appear to be nanced by cash ows
(i.e., increases in cash) arising from reductions in capital expenditure. If cash ows arise from improvement in operational
performance, those cash ows would be more permanent, given that operational protability is relatively persistent 11; but cash
ows arising from reductions in capital expenditures are more transitory because rms are unlikely to cut capital expenditures
year after year. Thus, our evidence is consistent with the conventional wisdom that rms use repurchases in distributing
temporary cash ows.

Acknowledgements
The authors appreciate helpful comments and suggestions from an anonymous referee, David J. Denis (the Editor), Mohammed
Alzahrani, Roy Song, Stephen Haggard, Shumi Akhtar, Yanzhi Wang and seminar participants at Sungkyunkwan (SKK) University,
Seoul National University, the 2008 Korea Securities Association Conference, the 2008 Asian Finance Association/Nippon Finance
Association International Conference (Yokohama), the 2008 NTU International Conference on Finance (Taipei), the 2009 Financial
Management Association Annual Conference (Reno). The usual disclaimer applies.

11
Dichev and Tang (2008) report that earnings persistence is as high as 0.782 for an average Compustat rm over a 40 year period, where earnings persistence
is a slope coefcient from a regression of current earnings on lagged earnings. Guay and Harford (2000) use changes in operating cash ows to extract the
permanent (temporary) component and then relate that component to the decision to increase dividends (repurchase shares). Similarly, Lee (1995, 1996) and
Kumar and Lee (2001) relate permanent components of aggregate earnings to decisions to pay dividends. The premise in these studies is that operating
protability (or protability) contains a substantial permanent component.

1326

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Appendix A

Table A.1
Description of key variables.
Payout variables
Share repurchase ratio (REPR)
Share repurchases during the year/beginning-of-the-year total assets
Dividend ratio (DIVR)
Cash dividends during the year/beginning-of-the-year total assets
Total payout ratio (TOTALR)
Cash dividends plus share repurchases during the year/beginning-of-the-year total assets
Explanatory variables
Cash holdings (CASH)
Beginning-of-the-year cash and short-term investments/ beginning-of-the-year total assets
Operating protability (ROA)
Earnings before interest and taxes/ beginning-of-the-year total assets
Market-to-book ratio (MBR)
Beginning-of-the-year market value of equity/beginning-of-the-year book value of equity
Firm Size (SIZE)
Beginning-of-the-year total assets
Leverage (LEVER)
Beginning-of-the-year long-term debt/beginning-of-the-year book value of equity
Stock returns (SRET)
Annual stock return during the previous year
Retained-earnings-to-total-equity ratio (RE/TE)
Beginning-of-the-year retained earnings/beginning-of-the-year total shareholder equity
Operating prot variability (ROAVOL)
The standard deviation of operating rate of return (i.e., EBIT/total assets) over the most recent four years including the current scal year
Non-operating income (NOPER)
Previous year's other income /previous year-end total assets

Table A.2
Changes in ROA, CFO and CFI for dividend-paying repurchasing rms. The table reports the mean and median values for changes in three variables, ROA, CFO and
CFI, in the years before and after share repurchases over the period 19982006. In this analysis, repurchasing rms are rm-years in which rms pay dividends and
initiate repurchases in year 0 (that is, these rms repurchase shares in year 0 but not in year 1). Panels 1, 2 and 3 report on changes in ROA (earnings before
interests and taxes divided by total assets), CFO (cash ows from operating activities divided by total assets) and CFI (cash ows from investing activities divided
by total assets), respectively. Column ( 2, 0) is the change in a given variable from year 2 through year 0. Other columns are similarly dened. For a given
variable, we drop observations for which the change in the variable is greater than 100% or lower than 100%. We calculate the mean and median changes by
using observations that have been Winsorized at the 1st and the 99th percentiles. The signicance levels of the means (medians) are based on a two-tailed t-test
(two-tailed Wilcoxon rank test). *, ** and *** indicate two-tailed signicance at the 10%, 5% and 1% levels, respectively. Mean and median values are expressed in
percentages.
( 2, 0)
1. Operating protability (ROA)
Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N
Germany
Mean
Median
N
Japan
Mean
Median
N
UK
Mean
Median
N
US
Mean
Median
N

0.104
0.091
73
0.907
0.124
45
0.372
0.176
52
1.787
0.734
55
0.922
0.444
614
1.741
0.548
334
0.924
0.809
488

( 1, 0)
0.808
1.164
97
1.042
0.538
63
0.775
0.156
97
0.203
0.736
65
0.136
0.266
1395
0.383
0.162
463
0.643
0.216
839

(0, + 1)

(0, + 2)

0.304
1.604
100
0.285
0.374
67
0.045
0.055
98
1.747
0.631
67
0.324
0.490

0.725
0.471
79
0.491
0.578
50
0.209
0.868
52
0.293
0.046
55
0.667
0.894

1396
0.990
0.117
464
0.624
0.117
831

636
0.757
0.282
341
0.770
0.532
491

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

1327

Table
(continued)
A.2 (continued)
( 2, 0)
2. CF from operating activities (CFO)
Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N
Germany
Mean
Median
N
Japan
Mean
Median
N
UK
Mean
Median
N
US
Mean
Median
N
3. CF from investing activities (CFI)
Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N
Germany
Mean
Median
N
Japan
Mean
Median
N
UK
Mean
Median
N
US
Mean
Median
N

0.408
1.098
74
0.629
0.288
45
0.442
0.777
52
0.254
0.673
52
0.320
0.267
496
0.275
0.066
336
0.223
0.133
508

( 1, 0)

(0, + 1)

(0, + 2)

0.100
0.465
94
0.103
0.039
57
0.352
0.438
88
1.282
0.737
61
0.314
0.170
758
0.208
0.014
418
0.689
0.578
634

1.109
0.040
95
0.330
0.226
62
0.590
0.264
85
0.798
0.091
63
0.202
0.078
758
0.592
0.392
417
0.328
0.132
633

1.606
0.112
81
1.318
1.007
50
1.387
0.267
51
0.430
0.825
56
0.061
0.225
644
0.589
0.389
343
0.944
0.631
517

494
4.692
1.453
330
2.083
1.104

2.951
1.022
94
0.688
0.717
57
0.967
0.349
88
0.213
0.614
61
0.027
0.144
758
3.506
1.447
414
1.455
0.577

3.815
0.984
95
0.647
1.200
62
1.360
0.384
84
1.052
0.312
63
0.145
0.025
758
1.589
0.256
412
0.897
0.273

3.582
2.441
80
0.685
0.908
50
2.464
2.406
50
2.431
1.813
56
0.124
0.004
644
0.787
0.622
339
1.457
0.404

503

630

632

514

6.096
2.896
74
3.943
2.170
45
2.262
0.066
53
4.844
1.244
52
0.961
0.441

Table A.3
Changes in ROA, CFO and CFI for non-dividend-paying repurchasing rms. The table reports the mean and median values for changes in three variables, ROA, CFO
and CFI, in the years before and after share repurchases over the period 19982006. In this analysis, repurchasing rms are rm-years in which rms do not pay
dividends but initiate repurchases in year 0 (that is, these rms repurchase shares in year 0 but not in year 1). Panels 1, 2 and 3 report on changes in ROA
(earnings before interests and taxes divided by total assets), CFO (cash ows from operating activities divided by total assets) and CFI (cash ows from investing
activities divided by total assets), respectively. Column ( 2, 0) is the change in a given variable from year 2 through year 0. Other columns are similarly dened.
For a given variable, we drop observations for which the change in the variable is greater than 100% or lower than 100%. We calculate the mean and median
changes by using observations that have been Winsorized at the 1st and the 99th percentiles. The signicance levels of the means (medians) are based on a twotailed t-test (two-tailed Wilcoxon rank test). *, ** and *** indicate two-tailed signicance at the 10%, 5% and 1% levels, respectively. Mean and median values are
expressed in percentages.
( 2, 0)
1. Operating protability (ROA)
Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N

7.344
9.782
16
0.061
1.190
57
7.737
9.277
13

( 1, 0)
7.239
9.498
25
1.584
1.422
110
1.454
0.981
27

(0, + 1)
1.665
3.005
31
1.749
0.629
117
0.451
2.520
25

(0, + 2)
5.175
1.555
24
2.417
0.938
85
11.349
15.029
13

1328

B.S. Lee, J. Suh / Journal of Corporate Finance 17 (2011) 13061329

Table
(continued)
A.3 (continued)
( 2, 0)

( 1, 0)

(0, + 1)

(0, + 2)

1. Operating protability (ROA)


Germany
Mean
Median
N
Japan
Mean
Median
N
UK
Mean
Median
N
US
Mean
Median
N

2.886
3.213
16
0.720
0.314
59
0.234
0.116
47
0.119
0.044
1255

2.459
0.245
29
1.206
0.204
139
0.558
0.060
93
0.890
0.151
2196

3.483
1.663
29
1.164
0.907
137
0.079
0.005
101
0.734
0.073
2258

6.105
5.409
23
2.826
1.736
61
0.011
0.070
61
0.980
0.336
1419

2. CF from operating activities (CFO)


Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N
Germany
Mean
Median
N
Japan
Mean
Median
N
UK
Mean
Median
N
US
Mean
Median
N

5.997
1.289
19
0.306
3.045
64
0.014
6.077
16
0.371
0.375
23
1.221
1.914
48
1.320
0.143
50
1.624
0.692
1439

6.260
4.579
28
1.143
0.581
98
3.689
2.834
28
3.388
0.667
33
0.793
1.614
71
2.562
0.247
83
0.404
0.212
1838

0.409
0.545
34
1.320
1.026
106
0.825
3.300
27
2.428
1.658
33
1.339
0.186
72
2.025
0.041
88
0.800
0.532
1901

1.987
0.051
29
1.060
0.451
95
4.386
5.362
17
0.255
4.418
28
1.998
1.074
62
1.205
0.138
62
1.161
0.737
1640

3. CF from investing activities (CFI)


Australia
Mean
Median
N
Canada
Mean
Median
N
France
Mean
Median
N
Germany
Mean
Median
N
Japan
Mean
Median
N
UK
Mean
Median
N
US
Mean
Median
N

5.418
6.210
20
7.518
2.750

1.922
1.847
28
4.926
1.477

60
5.382
5.872
14
5.470
0.958
21
0.848
0.579
48
3.514
0.338
51
3.350
1.275

95
2.556
0.534
28
2.075
0.839
29
0.699
0.112
70
2.142
0.547
82
2.519
0.593

1391

1774

5.105
1.018
33
2.040
1.125
101
0.924
0.085
27
3.533
0.382
33
1.366
0.243
71
1.721
1.035
87
1.022
0.241
1864

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