Share Repurchases and Investor Preferences

Abstract

In this paper, we construct a market equilibrium model to explain why firms repurchase their shares, the popularity of share repurchases compared to dividends, and the preference of share repurchases by institutions and corporate investors despite their tax disadvantage to corporate investors. Share repurchases help shareholders diversify their portfolios, provide firms with flexibility in distributing cash to their shareholders, help institutions and corporate investors take controlling positions in firms, and lead to a rise in share price, benefiting both selling and not selling shareholders through a rise in share price and firms through a low cost of capital.