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Capital Expenditure and Payout Policy
Subramanian Rama Iyera Harry Fengb
Ramesh P. Raoc
_____________________________ a FITE Department, Anderson School of Management, University of New Mexico, Albuquerque,
NM 87111. Email: [email protected], Tel: 505-277-3207 b Department of Finance, Spears School of Business, Oklahoma State University, Stillwater, OK
74078. Email: [email protected], Tel: 405-744-5199 c Department of Finance, Spears School of Business, Oklahoma State University, Stillwater, OK
74078. Email: [email protected], Tel: 405-744-1385
Capital Expenditure and Payout Policy
Abstract
Managerial perception as well as empirical evidence suggests that repurchases are inherently more flexible than dividends. The rigidity of dividends and the apparent flexibility of share repurchases could impact firm investments. Firms may forego profitable investment opportunities to maintain their dividend level, while repurchases could be easily scaled back to fund profitable investment projects without fear of an adverse market reaction. We test the flexibility hypothesis of repurchases by regressing capital expenditures on repurchases and dividends in addition to other control variables. Consistent with the hypothesis, we find an inverse relationship between capital expenditures and repurchases but an insignificant relationship with dividends. Further, we find that the flexibility associated with repurchases is prevalent for firms with high financial constraints and in the more recent time period when repurchases became popular.
JEL Classification code: G35
Keywords: payout policy, stock repurchases, stock buybacks
I. Introduction
Over the years share repurchases1 have become an important mode of payout. Firms that
initiate payouts show an increasing propensity to repurchase stock than to pay dividends. Even
dividend paying firms over time have increased the proportion of share repurchases in their total
payout (Grullon and Michaely (2002)). The increased preference for share repurchases over
dividends could be due to many reasons. One that has received considerable attention, and the
focus of this study, is the flexibility that repurchases accord but dividends do not. Very simply,
by flexibility we mean that repurchases do not engender a commitment on the part of the firm to
continue to make payouts once initiated or to raise them periodically once initiated. Dividends
on the other hand are assumed to have this implicit commitment. The flexibility of repurchases
can have real consequences, especially when firms face financial constraints. It enables firms to
curtail or even eliminate buybacks when there is a need to preserve liquidity or to pursue
profitable investment opportunities without fear of being penalized by the market.
The notion of flexibility is supported by survey and empirical evidence. Brav, Graham,
Harvey, and Michaely (2005) survey financial executives and find that managers like the
flexibility of share repurchases and dislike the rigidity of dividends. Survey results reveal that
this preference for repurchases stems from the view that once a firm initiates a dividend, it is
expected to continue to pay dividends. However, share repurchases are not viewed as being
subject to a similar expectation. While most managers agree that reducing dividends will draw
negative abnormal market reaction, only a small proportion of financial executives consider
reducing repurchases as having such an adverse consequence.
1 We consider only open market repurchases and do not address other modes of share repurchases such as Dutch auctions or tender offers.
Consistent with the reservations expressed by managers on dividends, Fama and French
(2001) note that the proportion of firms paying cash dividends has decreased drastically. They
document a lower propensity to pay dividends even after controlling for the observed tilt in listed
firms towards firm characteristics that do not favor payment of dividends – small, low earnings,
and high investment firms. They also state that the perceived value from paying dividends has
declined. Grullon and Michaely (2002) and Jagannathan, Stephens, and Weisbach (2000) find
that share repurchases have increased in prominence compared to dividends. Grullon and
Michaely (2002) document that large, established firms have not decreased their dividend
payouts, but they display a higher propensity to pay out cash through share repurchases.
Together, these two papers find that the increase in share repurchases can explain the decreasing
propensity to pay dividends, which also corroborates the survey evidence in Brav et al., (2005).
However, none of these studies explicitly tests the flexibility hypothesis. The flexibility offered
by share repurchases could be a primary factor explaining why firms choose to repurchase shares
instead of paying dividends.
In this paper we test the relative flexibility of repurchases and dividends by focusing on
how flexibility affects firms’ investment activity. Specifically, we test the sensitivity of capital
expenditures to dividends and repurchases. In brief, we document a negative coefficient for
repurchases and a generally insignificant coefficient for dividends when capital expenditures are
regressed on the two forms of payout and other control variables. The inverse relationship
between capital expenditures and repurchases suggests that when investments needs are high
firms scale back on repurchases and vice-versa. The insignificant coefficient for dividends on
the other hand implies that dividends are not secondary to capital investments. Further, we
expect and find that the flexibility of repurchases is stronger for firms that are more constrained.
Finally, not surprisingly, we find that support for flexibility is stronger in the second half of the
sample period (1992-2012) when repurchases became much more popular.
The remainder of the paper is organized as follows. The next section presents the
hypotheses. Section 3 describes the methodology and sample construction. Section 4 presents the
empirical results while section 5 concludes.
II. Hypotheses development
The flexibility offered by share repurchases can be classified into short term flexibility
and long term flexibility. In the short term, a firm that announces an open market share
repurchase program may choose not to carry through with the promise. Once a repurchase
program has been announced a firm may opt not to repurchase any stock under the program and
it may divert the cash earmarked for repurchases to some other avenue. Alternately, the firm may
opt to repurchase only a fraction of the amount sought during the announcement of the program.
In the long term, a firm that distributes excess cash flow through share repurchases may choose
not to announce a share repurchase program every year. The firm is also not expected to
maintain the same level of share repurchases as the previous year. The firm may choose to
increase or decrease the amount spent on share repurchases.
On the other hand, dividends do not offer the firm such flexibility. Managers consider
dividends to be fairly rigid (Brav, Graham, Harvey and Michaely (2005 )). Once a firm initiates
dividends it is expected to continue this course of action, which acts as a disincentive to initiate
dividends in the first place. In other words, once dividends have been initiated, a firm is expected
to distribute dividends each year. It is also expected that firms increase dividends each year, or at
least maintain the level of dividends paid in the previous period. Firms contend that there is not
much reward when they raise dividends. With dividends, firms believe that the cost of altering
course by reducing dividends is greater than the cost of maintaining it. Any reduction in the
dividend is interpreted as a sign of an ominous future and share prices tumble once a dividend
reduction is announced. Therefore, firms will opt to cut dividends only under extreme
circumstances.
Maintaining dividends thus assumes top priority and any increases in dividends are
considered to be second order. Under these circumstances, one has to infer that dividends are not
treated as residual cash flows. Dividend decisions will be made at least simultaneously along
with investment decisions, if not earlier. Such a conservative dividend policy means that firm
investments could suffer if it boils down to a choice between maintaining dividends and
investment spending. A portion of the cash flow will be apportioned towards dividends as well as
necessary investments. To the extent that dividends impose a binding constraint on the firm’s
cash flows, the firm may not invest adequately if cash flow is not sufficient to support both
dividends and investments and if there is a constraint in accessing external capital. Consistent
with this notion, managers interviewed by Brav et al. (2005) expressed the view that they might
pass up some positive net present value (NPV) projects before cutting dividends. Some
expressed the willingness to raise external capital to fund investments without cutting dividends.
Raising external capital is costly. The fact that managers are willing to raise external capital
instead of cutting dividends to support investments lends further support to the view that
dividends could be a binding constraint that may hamper necessary investments. This view is
also supported by Daniel, Denis and Naveen (2010) who find that only 6% of the firms in their
sample cut dividends when faced with a cash flow shortfall. Interestingly, 68% of firms opt to
make significant cuts to investments. More formally, dividend inflexibility leads to the following
testable hypothesis:
H1: Dividends and investments are not inversely related.
Unlike dividends, firms may not feel as constrained with share repurchases. While
dividend payout ratio targets have been widely talked about, there is hardly any mention of a
share repurchase ratio target in the academic world or in the business press. The dividend paying
history of a firm also determines the decision to pay dividends. However, the share repurchase
history of a firm is hardly been indicated as a motivation to repurchase shares. Firms may not
feel as burdened with the history of shares repurchases when it comes to their current decision on
share repurchase programs. While dividends may be simultaneously determined along with
investments, share repurchases are decided once necessary investments and liquidity needs have
been met. To that extent, share repurchases are truly residual cash flows. Firms could cut share
repurchases to support any positive NPV projects without the fear of any adverse market
reaction. Therefore, the ability of share repurchases to adversely impact firm investments is
expected to be negligible. The flexibility of repurchases implies the following testable
hypothesis:
H2: Repurchases and investments are inversely related.
The flexibility argument presumes that external financing is costly. If accessing external
markets is costless, payout policy would not matter. Firms following a rigid dividend policy will
not have to sacrifice or forego profitable investment opportunities as they can easily finance
these by accessing the external capital markets. Thus a repurchasing payout policy does not
confer any flexibility advantage over a dividend payout policy. There is considerable amount of
research on how financial constraints affect investments. Much of this literature focuses on the
sensitivity of investments to cash flow. The idea being financially constrained firms have to
primarily rely on internal cash flow sources, therefore for these firms investments will be much
more sensitive to internal cash flows than unconstrained firms. In a seminal paper Fazzari,
Hubbard, and Petersen (1988) document a greater sensitivity of investment to cash flows for
financially constrained firms even after controlling for growth opportunities. Using participation
in the capital markets (debt) as an indicator of financial constraint, Gilchrist and Himmelberg
(1995) find that firms that did not participate had very high sensitivity of investments to cash
flow.2
Based on the above, the flexibility argument for repurchases should be stronger when
financial constraints are more severe. This leads to our third testable hypothesis:
H3: The inverse relationship between repurchases and investments will be stronger for
more financially constrained firms.
Our final hypothesis examines the change in the sensitivity of investments to repurchases
over time. There are several reasons why the sensitivity may change over time. Fama and
French (2001) find that the propensity of firms to pay dividends dropped from 66.5% in 1978 to
20.8% in 1999. They attribute this decline in propensity to changing characteristics of firms such
as a shift towards smaller, low profitable, and high growth firms. Grullon and Michaely (2002)
2 Not everyone agrees with the interpretation that higher sensitivity of investments to internal cash flows is
associated with higher constraints. Kaplan and Zingales (1997) find that the least constrained firms exhibit higher investment-cash flow sensitivity than firms that are classified as more financially constrained. They state that cash flow may act as a proxy for investment opportunities and the presence of outliers may explain the conflicting results found by Fazzari et al. (1988). Classifying firms a priori into different groups by size, Kadapakkam, Kumar and Riddick (1998) use an international sample and find that the investment-cash flow sensitivity is lowest in the small firm group and highest among the large firms, which is also confirmed by Cleary (1999). On the other hand, Allayannis and Mozumdar (2004) show that Kaplan and Zingales’ (1997) results may have been influenced by possible outliers and by firms that face financial distress. Using negative cash flows as proxy for financial constraints and by removing some of the outliers in the Kaplan and Zingales (1997) study, Allayannis and Mozumdar (2004) find results that are more in line with Fazzari et al. (1988). Using simulated data Alti (2003) demonstrates that investment and cash flow can be closely related even when financing is frictionless. While these studies question the interpretation of the sensitivity of investments to cash flow as an indication of the impact of financial constraints on investments, they do not suggest that financial constraints do not impact investments.
propose the substitution hypothesis stating that repurchases have replaced dividends as the
preferred mode of payouts for many firms. In part, this is attributed to the Securities and
Exchange Commission adoption of 10b-18 Safe Harbor Rules in 1982. This rule provided safe
harbor from liability for manipulation security prices. The shift to repurchases, motivated in part
by regulatory changes and the greater desire for flexibility, suggests that the flexibility effect of
repurchases should be stronger over the latter part of the sample period. This leads to our final
testable hypothesis:
H4: The inverse relationship between repurchases and investments will be stronger for
latter half of the sample period.
III. Empirical Methodology and Data
Our empirical methodology is straightforward. We regress capital expenditures on
repurchases and dividends, and a host of control variables.
������,� =�� �����ℎ�����,� + ������������,� + ��� !"�#$%"&%'#()&,! +*�,� (1)
All variables are measured annually. Our main test variable, Repurchases is defined per Grullon
and Michaely (2002) as cash expenditures on the purchase of common and preferred stock minus
any reduction in the book value of preferred stock. This measure has further been used in other
papers including Billet and Xue (2007), and Lie (2005). Dividends is defined as the total cash
dividends paid per year. Next we discuss the control variables. Size, is defined as the log of firm
assets. Leverage is defined as the sum of long term debt and short term debt scaled by the total
assets net of cash equivalents. Market to Book, which captures the growth potential of a firm, is
defined as the sum of market value of shares and total assets net of cash equivalents and common
equity. The resultant value is scaled by the total assets net of cash equivalents. TANGIBILITY, a
measure of borrowing capacity, is defined per Almeida and Campello (2007) as follows:
+��,�-�.�/0 = (0.715 × �� + 0.547 × 9��/ + 0.535 × ���)/(+=/����/� − ���ℎ)
(2)
where Rec, Invt, PPE, Tot assets and Cash are receivables, inventory, net property plant and
equipment, total assets, and cash and equivalents, respectively. Our final variable, which we
include to control for internal cash availability, Cash Flow, is defined as operating income before
depreciation and scaled by total assets net of cash equivalents. All of the above mentioned
variables are taken from Compustat.
Our sample construction requires some explanation. Since our primary goal is to test for
flexibility of repurchases, we focus on firms that engage in buybacks. Specifically, our base
sample consists only of firm year observations which show repurchase activity between 1971
and 2012. That is, we exclude all firm year observations that do not contain repurchase activity.
We relax this to some degree in our robustness tests. The primary reason for eliminating non-
repurchasing firms is because the sensitivity of investments to repurchases will be obscured if
there are an overwhelming number of non-repurchasing firms in the dataset. This is especially
true in the first part of the sample when repurchases are fairly rare events. Most of the
repurchases in the first part of the sample period, especially in the 1970s and early 1980s, tend to
occur for signaling purposes rather than as a result of a firm’s payout policy. In the latter period,
though repurchases became much more popular, there was an explosion of companies that went
public did not have any established payout policy (Fama and French 2001).
One could argue that by keeping only firms that made a repurchase in a given year, we
are biasing our sample to repurchasing firms and away from dividend paying firms. This is only
partly true. Many of the repurchasing firms also pay out dividends, thus we are only excluding
firms that paid out dividends but did not engage in repurchases. This too is by design. We
exclude firms that follow an exclusive policy of paying out dividends (and not engage in
repurchases) because they may be fundamentally different from repurchasing firms, e.g., their
growth requirements are nominal and may be fully funded through internal cash flow. Including
them could lead to confounding results. If higher dividend payout firms are associated with
lower growth and lower capital expenditures, this would yield an inverse relationship between
dividends and capital expenditures but is not an indication of flexibility. However, we are still
able to test for the relative flexibility of dividends as called for in our first hypothesis. We are
able to do this because many firms that repurchase shares also disburse cash to their shareholders
via cash dividends. This actually allows us to conduct a more meaningful test of the relative
flexibility of dividends and repurchases because the same firm serves as a control. That is, by
comparing the relative use of dividends and repurchases by the same firm we need not worry
about combining what may be two fundamentally different groups of firms that find it optimal to
use follow an exclusive payout policy.
Our empirical methodology also requires a method to identify a firm’s degree of financial
constraint. Recall that hypothesis 3 proposes that the need for payout flexibility will be
especially important for highly financially constrained firms. There are several proxies to
measure a firm’s degree of financial constraint. Two measures that have been widely used in the
literature are the the KZ index and the WW index. (Lamont et. al 2001, Whited and Wu 2006)
Summary Statistics
Table 1 – panel A presents the summary statistics of firms in the sample. The sample
firms on average invest 7.24% (4.71% median) of total assets in capital assets and spend 3.48%
(0.97% median) of total assets on share repurchases. On the other hand, sample firms on average
pay 1.53% (.07%) of their total assets as dividends. Thus, many firms that buyback shares also
pay out dividends. Recall that these averages are not for all firms but rather for firm year
observations that show repurchase activity.
The average firm in our sample has $2,053 million in assets ($66.32 million) with a range
of $6.6 million and $667.3 million between the lowest quartile and highest quartile. Leverage for
the firms in our sample ranges from 4.26% to 34.08% between the lowest quartile and highest
quartile. Firms in our sample have high growth potential as reflected in the average market to
book ratio of 2.11 (1.28 median). This is consistent with the fact that our sample is restricted to
firms that repurchased stock, which in general tend to have higher growth potential than non-
repurchasing firms. The sample firms have a healthy cash flow averaging 6.00% (8.32%
median) of total assets. Fixed assets on average make up 36.38% (39.54%) of total assets. The
average age of the sample firm is 15 years (12 years) and some of the oldest firms being in
existence for more than 22 years and some of the youngest firms being in existence for only less
than 6 years.
Panel B presents the correlation statistics between the test variables and control variables.
It is interesting to note that capital expenditures are negatively correlated with repurchases
consistent with the flexibility argument. However, dividends also exhibit a similar negative
correlation with capital expenditures. Larger firms and older firms appear to spend less on
capital expenditures while higher cash flows are associated with higher capital expenditures.
There is also a positive relationship between tangibility and capital expenditure, which is
expected. The correlation matrix also reveals that multicollinearity is not likely to be a problem
based on the pair-wise correlations between the various independent variables.
[Insert Table 1 about here]
IV. Results
Hypotheses 1 and 2
Table 2 presents estimates of equation (1) which we use to test hypotheses 1 and 2. Our focus is
on the significance and sign of the coefficient for Repurchases and Dividends. Columns 1
through 3 provide coefficient estimates for equation (1) but vary depending on the fixed effects
employed—year, industry, and industry and year, respectively. In all three columns we find that
capital expenditures and repurchases are significantly negatively related. On average a one
percent decline in repurchases is associated with an increase of 0.04% in capital expenditures.
This supports hypothesis 2 that firms curtail repurchases to fund capital investment needs. On
the other hand we observe that the coefficient for Dividends is insignificant supporting
hypothesis 1 that firms do not adjust dividends in response to their investment needs. Recall that
our sample consists of firms that engage in buybacks and may also distribute dividends on a
regular basis. Based on the evidence in Table 2 columns 1-3, it is apparent that firms adjust their
repurchases depending on their capital expenditure needs but the same firms in all likelihood
leave their dividends untouched or view them independent of their capital expenditure decisions.
With regard to the control variables, firms with high market to book and high tangibility
tend to spend more on capital expenditures, which is to be expected. Older firms have lower
capex requirements while lower leverage is associated with higher capital expenditures. While
the latter may be surprising it is consistent with Myers’ pecking order theory and the flexibility
argument. The higher agency and information costs of external capital induces firms to redirect
funds that could have been used to repurchase shares to capital expenditures.
Columns 4-5 present estimates of equation (1) but consider an extended sample of firms.
The base sample considers only firm year observations that had non-zero repurchase values. Our
sample excludes firms that have a positive repurchase activity in a given year but choose to
eliminate repurchases the following year, perhaps to fund capital expenditure or other needs.
While this makes our estimates in columns 1-3 more conservative, previously repurchasing firms
that choose not to repurchase stock temporarily should also be viewed as firms that value the
flexibility of repurchases. Accordingly, in columns 4-5 we extend our base sample to include
two more years of data for each firm. Column 5 additionally treats negative net repurchases as
zero repurchases. We do this to ensure that the inverse relationship between repurchases and
capital expenditures is not driven by net issuing firms (negative repurchases) that may be using
the funds to increase investments.
Our core findings are unaffected by the extended sample used in columns 4-5. The
coefficient for Repurchases is unchanged with a negative sign supporting the flexibility
hypothesis while the coefficient for Dividends is still insignificant. Thus across all the
estimations in Table 2 we find support for the flexibility hypothesis, that is, repurchases are
curtailed when investment needs are high whereas we don’t find such a relationship for
dividends.
[Insert Table 2 about here]
Hypothesis 3
We now examine the potential moderating role of financial constraints on the flexibility of
repurchases. Firms with low financial constraints may have access to external capital sources to
continue their payouts without any disruptions to their capital investments. On the other hand
firms that rank high on financial constraints either have to forgo profitable opportunities or, as
we argue in this hypothesis, have the opportunity to redirect their payouts to more profitable
investments.3 Our second hypothesis tests the above mentioned contention. To test this
hypothesis, as discussed previously, we utilize the KZ and WW financial constraint indexes. We
calculate the KZ index and WW index for each firm every year and classify firms into low and
high financial constraint subsamples using the median values of the respective indexes for each
year. We then estimate equation (1) separately for the low and high constraint subsamples.
[Insert table 3 about here]
Results are presented in Table 3. Columns 1 and 2 (3 and 4) present regression estimates
for the low and high financial constraint subsamples using the KZ (WW) index, respectively.
The coefficient for Repurchases is significantly negative for the high constraint subsample using
either index. On average, for firms with high financial constraint according to the KZ index
(WW index) a 1% reduction in repurchases is associated with a 0.04 % (0.03%) increase in
capital expenditures. The coefficient for Repurchases is either insignificant or positively
significant in the low financial constraint subsample. These findings are consistent with our
hypothesis that the flexibility associated with repurchases primarily manifests itself when firms
are highly constrained. In the case of dividends, the coefficient is insignificant for both low and
high KZ index subsamples, and the low WW index subsample but surprisingly exhibits a
negative significant coefficient for the high WW index group though the significance is only at
the 10 percent level.
Overall, Table 3 tells us that with low financial constraints firms’ payouts (dividends or
repurchases) are independent of capital expenditures or even positive. Flexibility for payout
policy should not matter for these firms since they are presumed to have sufficient access to
capital markets to meet their investment needs. On the other hand, payout flexibility appears to
3 There are other options that firms may avail including asset sales, alliances, etc.
matter for firms with higher financial constraints that do not have easy access to external
financial markets. The significant negative coefficient for Repurchases for high constraint firms
suggests that these firms curtail their repurchases to fund capital expenditures.
Hypothesis 4
In our final test we estimate the capital expenditure-payout relationship for the sample classified
by time. We hypothesize that the flexibility associated with repurchases will be stronger in the
second half of the sample period. As hypothesized, repurchases became much more common
starting in the 1980s because of easier regulation and presumed awareness of their flexibility.
Table 4 column 1 (2) present estimates of equation (1) for the 1971-1991 (1992-2002)
subperiods. Consistent with our expectation the coefficient for Repurchases is significantly
negative for the second subperiod but insignificant in the first subperiod. Interestingly, the
coefficient for Dividends is significantly negative in the first subperiod when we expected it to
be non-negative in both subperiods.
[Insert table 4 about here]
V. Conclusions
Managers consider share repurchases to be more flexible than dividends, which may
account for the increased popularity of repurchases over dividends in the past two decades.
Survey evidence indicates that managers perceive dividends to be permanent commitments while
repurchases are assumed to be flexible. As a result firms may be constrained by their dividend
policy. When internal cash flow is insufficient to meet investment needs, a firm has several
options: reduce its investments and continue its payouts, raise external capital to support the
investment, or reduce payouts to support the investment. If firms are constrained from cutting
their dividend, then investments may be pared back. On the other hand, because repurchases are
viewed to be flexible managers may tend to adjust their repurchase activity to meet capital
expenditure needs without worrying about investor backlash.
We test the flexibility hypothesis by regressing capital expenditures on repurchases and
dividends. Consistent with the hypothesis we find that capital expenditures are inversely related
to repurchases but not to dividends. We also find that the inverse relationship manifests itself in
high financial constraint firms but not in low constraint firms. Finally, we observe that the
repurchase flexibility hypothesis is prevalent in the second half of the sample period when
buybacks were much more common. Overall we conclude that share repurchases are more
flexible than dividends.
Appendix 1 – This table describes the main control variables that will be used in testing our hypotheses.
Variable Name Description Data Source
CAPEX Capital Expenditures scaled by total assets COMPUSTAT
REPURCHASES Cash expenses on purchase of common and preferred stock minus any reduction in book value of preferred stock scaled by total assets
COMPUSTAT
DIVIDENDS Cash dividends scaled by total assets COMPUSTAT
SIZE Natural log of total assets COMPUSTAT
LEVERAGE Sum of long term debt and short term debt scaled by total assets net of cash equivalents
COMPUSTAT
MTB Sum of market value of shares and total asset net of cash equivalents and net of common equity scaled by total assets net of cash equivalents
COMPUSTAT
CASH FLOW Operating income before depreciation scaled to total assets net of cash equivalents
COMPUSTAT
TANGIBILITY Weighted value of sum of book value of a firm's receivables, inventory and capital scaled by total assets net of cash equivalents
COMPUSTAT
AGE Number of years since a firm first appeared on COMPUSTAT
COMPUSTAT
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Table 1 Descriptive statistics and correlations of firm net repurchase and firm characteristics. The sample includes all continuous non-positive net repurchase firm-years in the CRSP and Compustat database during the period 1971 to 2012. The sample excludes financial and utility firms. Panel A reports descriptive statistics, and Panel B reports Pearson correlation coefficients. Net repurchase and all control variables are winsorized at the 1st and 99th percentiles. ***, **, and * in Panel B denote significance at the 1%, 5%, and 10% levels, respectively.
Panel A
Descriptive Statistics
Variable N Mean Std Dev 1st Quartile Median 3rd Quartile
Capex 74,886 0.0724 0.0869 0.0188 0.0471 0.0921
Repurchases 75,820 0.0348 0.0690 0.0022 0.0097 0.0344
Dividends 75,618 0.0153 0.0334 0 0.0007 0.0185
Size 75,228 2053.8 8111.18 6.5912 66.3275 667.2796
Leverage 75,496 0.2240 0.2093 0.0426 0.1836 0.3408
Market to Book 69,417 2.1152 3.5236 0.9927 1.2827 2.0387
Cash Flow 74,099 0.0600 0.1675 0.0311 0.0832 0.1304
Tangibility 72,022 0.3638 0.1521 0.2579 0.3954 0.4858
Age 75,606 15.7094 13.3426 6 12 22
Panel B
Correlation between cash, CEO incentives, and firm characteristics
Variable Capex Repurchases Dividends Firm Size Leverage
Market to
book Cash Flow Tangibility Firm age
Capex 1
Repurchases -0.0071** 1
Dividends -0.0065*** 0.0148*** 1
Size -0.1401*** -0.0215*** -0.0106*** 1
Leverage -0.002 0.0224*** -0.0003 -0.0221*** 1
Market to
book -0.0042 0.0770*** -0.0001 -0.03*** 0.2461*** 1
Cash Flow 0.0079** 0.4018*** 0.0012 0.0329*** -0.4785*** -0.3537*** 1
Tangibility 0.1677*** -0.0088** -0.0259*** -0.1081*** -0.0021 -0.0150*** 0.0097*** 1
Firm age -0.0793*** -0.0056 0.0016 0.4556*** -0.0027 -0.0065* 0.0065* 0.0129*** 1
Table 2 Regressions of Capex on Repurchases and control variables. The dependent variable is the ratio of Capex to Net Assets. All independent variables are defined in section on Data and descriptive statistics. Models 1–3 regresses Capex in fiscal year t on net repurchase in year t. Models 4-5 regress Capex in fiscal year t on net repurchase in year t. We keep the Repurchases year and following three years after the repurchase in model 4-5. In model 4, net issuance of equity is treated as negative net repurchase. In model 5, we treat the net equity issuance as zero. Industry dummies are based on two-digit Standard Industrial Classification codes. T-Statistics are in parentheses. The t-statistics are based on heteroskedastic-consistent standard errors. ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.
Independent variable Repurchase
year (1) Repurchase
year (2) Repurchase
year (3) Three years (4) Three years (5)
Repurchases -0.0004 -0.0004 -0.0004 -0.0004 -0.0004
(-2.76)*** (-3.01)*** (-2.93)*** (-2.92)*** (-2.97)***
Dividends -0.0002 -0.0002 -0.0002 -5.2E-05 -5.3E-05
(-0.73) (-0.96) (-0.91) (-0.82) (-0.84)
Firm Size -0.0024 -0.0022 -0.0014 0.0001 0.0001
(-14.61)*** (-14.16)*** (-8.72)*** (0.79) (0.93)
Leverage -0.0002 -0.0001 -0.0001 -0.0173 -0.0180
(-5.15)*** (-4.67)*** (-4.72)*** (-13.6)*** (-14.26)***
Market to book 0.0012 0.0009 0.0010 0.0030 0.0030
(16.24)*** (13.87)*** (14.35)*** (30.75)*** (31.18)***
Cash Flow -2.2E-06 -2.6E-06 -1.4E-05 0.0039 0.0032
(-0.05) (-0.07) (-0.37) (3.2)*** (2.67)***
Tangibility 0.0543 0.0571 0.0433 0.0485 0.0483
(24.04)*** (23.91)*** (17.57)*** (24.07)*** (24.28)***
Firm age -0.0005 -0.0006 -0.0006 -0.0007 -0.0007
(-18.96)*** (-23.26)*** (-22.48)*** (-31.41)*** (-31.95)***
Intercept 0.0814 0.0814 0.0857 0.0793 0.0797
(63.73)*** (59.82)*** (62.24)*** (70.68)*** (71.69)***
Industry dummies No Yes Yes Yes Yes
Year dummies Yes No Yes Yes Yes
Number of observations 64,349 64,349 64,349 95,350 95,350
Adj.R^2 0.06 0.18 0.19 0.19 0.19
Table 3 Regressions of Capex on Repurchases and Financial Constraints. The dependent variable is the ratio of Capex to Net Assets. All independent variables are defined in section on Data and descriptive statistics. Models 1–2 regress Capex in fiscal year t on net repurchase in year t. We separate the dataset into two subsamples by the median KZ index of each year. Models 3-4 repeat the same analysis with WW index. Industry dummies are based on two-digit Standard Industrial Classification codes. T-Statistics are in parentheses. The t-statistics are based on heteroskedastic-consistent standard errors. ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.
Independent variable Low KZ Index (1) High KZ Index (2) Low WW Index(3) High WW Index(4)
Repurchases 0.0028 -0.0004 0.0086 -0.0003
(0.64) (-2.56)*** (2.27)** (-2.3)**
Dividends -5.9E-05 -0.0009 0.0002 -0.0007
(-0.29) (-1.45) (1.25) (-1.76)*
Log firm size -2.76E-08 1.36E-07 -2.16E-08 8.56E-08
(-1.37) (2.19)** (-1.41) (1.18)
Leverage -0.0317 -8.6E-05 -0.0222 -9.6E-05
(-13.81)*** (-2.76)*** (-12.73)*** (-3.02)***
Market to book 0.0071 0.0006 0.0068 0.0008
(28.79)*** (7.5)*** (24.16)*** (9.61)***
Cash flow -0.0014 -5.5E-05 0.0016 -2.4E-05
(-0.47) (-1.32) (3.1)*** (-0.55)
Tangibility 0.0133 0.0871 0.0866 0.0340
(4.36)*** (21.22)*** (30.35)*** (9.41)***
Firm age -0.0006 -0.0008 -0.0003 -0.0012
(-20.28)*** (-18.24)*** (-15.2)*** (-24.61)***
Intercept 0.0849 0.0716 0.0475 0.0926
(53.8)*** (34.3)*** (25.21)*** (51.73)***
Industry dummies Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes
Number of observations 33,366 30,668 30,755 33,279
Adj.R^2 0.19 0.20 0.34 0.15
Table 4 Regressions of Capex on Repurchases and Substitution Hypothesis. The dependent variable is the ratio of Capex to Net Assets. All independent variables are defined in section on Data and descriptive statistics. Models 1–2 regress Capex in fiscal year t on net repurchase in year t. We separate the dataset into two subsamples by year 2001. Industry dummies are based on two-digit Standard Industrial Classification codes. T-Statistics are in parentheses. The t-statistics are based on heteroskedastic-consistent standard errors. ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.
Independent variable Before 1992 (1) After 1992 (2)
Repurchases 0.0015 -0.0003
(0.86) (-2.53)**
Dividends -0.0527 -0.0001
(-4.59)*** (-0.5)
Log firm size 1.31E-06 1.52E-08
(5.72)*** (0.77)
Leverage 0.0203 -0.0001
(6.26)*** (-4.31)***
Market to book 0.0131 0.0008
(23.62)*** (12.17)***
Cash flow 0.0130 -4.7E-05
(4.66)*** (-1.39)
Tangibility -0.0067 0.0598
(-1.17) (22.11)***
Firm age -0.0013 -0.0006
(-18.99)*** (-22.66)***
Intercept 0.0830 0.0605
(16.77)*** (35.94)***
Industry dummies Yes Yes
Year dummies Yes Yes
Number of observations 19,545 44,489
Adj.R^2 0.11 0.24