Regulation, Taxes,
and Share Repurchases in the U.K.
P. Raghavendra Rau and Theo Vermaelen
Krannert School of Management, Purdue University
INSEAD
We examine share repurchase activity in the U.K. over
a period when the tax and regulatory environment changed
drastically, enabling us to examine the relative power
of various explanations for share repurchase activity.
We find that the form and intensity of repurchase activity
in the U.K. is heavily influenced by the tax consequences
for pension funds. We also find that firms announcing
share repurchases earn smaller excess returns, both in
the short run and the long run, than those earned by
firms in the U.S. We explain this by two factors: first,
because of specific regulatory provisions, it is less
likely that U.K. firms can use superior information to
buy back shares when their shares are undervalued. Second,
many buyback programs are set up to allow pension funds
to earn tax credits. Specifically, buybacks designed
to provide specific tax benefits to pension funds generate
insignificant excess returns, both in the short run and
the long run.
This paper has been published in the Journal
of Business, 75, 245-282.
It has been presented at:
- Casewestern Reserve University
- Purdue University
- University of Miami
- University of Strathclyde
- European Finance Association meetings, Vienna, 1997
- Financial Management Association meetings, Chicago,
1998
- European Financial Management Association meetings,
Paris, 1999
and has won the
- Chicago Quantitative Alliance Award , Spring 2002
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