The contribution of stock repurchases to the value of the firm and cash holdings around the world

Using corporate payout data from 33 economies, this study investigates the contribution of stock repurchases to the value of the firm and cash holdings in different country-level investor protection environments. We find that stock repurchases contribute more to firm value in countries with strong investor protection than in countries with weak investor protection. We also report that dividends contribute approximately 60% more to firm value than repurchases in countries with weak investor protection. Furthermore, as the proportion of repurchases in total payouts increases, the marginal value of cash increases in countries with strong investor protection, whereas it declines in countries with weak investor protection. In a poor investor protection environment, the marginal value of cash for a firm that makes 100% of its payouts via repurchases is 12 cents lower than that for a firm that distributes 100% of its payouts via dividends. Overall, our findings highlight that stock repurchases are less effective than dividends in mitigating agency problems associated with free cash flow in countries with poor investor protection.