Why Do UK Firms Repurchase Their Own Shares?

Abstract

We examine the practice of share repurchases in the UK. 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 listed firms. However, unlike in the US, repurchases remain a small proportion of total distributions to shareholders. We test five key hypotheses from prior literature. Our analysis of a large sample of firms from 2000 to 2016 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 the leverage/capital structure hypothesis in the first regime only. In contrast to the US, the dividend substitution hypothesis is not supported. In the UK, the extent of share repurchases remains relatively small, and they appear to be used as a complement to regular dividends, being made regularly, in an amount positively associated with dividends paid.