WHY DO UK FIRMS REPURCHASE THEIR OWN SHARES?

We examine the practice of share repurchases in the UK from 2000 to 2016. We find that an important regulatory reform in 2003, which relaxed previously strict rules about repurchases, was followed by a significant increase in repurchase activity by UK main-market listed firms. We then examine the motivation for repurchases, testing several key hypotheses from prior literature. Our analysis of a sample of 6,119 firm years provides strong support, across both regulatory regimes, for both the free cash flow and the investment hypotheses. We find some support for both the undervaluation and also the leverage/capital structure hypothesis in the pre-reform period only. Post-reform, board independence is associated with share repurchase activity. We document several important differences between the UK and the US. First, most UK firms distribute cash to shareholders, whereas most US firms do not. Second, share repurchases remain relatively small in both proportion and value the UK. Third, we find no evidence that repurchases are substituting for dividends in the UK, and dividends continue to dominate as a mechanism of cash disbursement in the UK.