AN ANALYSIS OF STOCK REPURCHASE TRANSACTION USING A PANEL DATA SAMPLE SELECTION MODEL

Prior studies have examined repurchase decisions (i.e., whether to repurchase or not) and the determinants of repurchase amount (i.e., if yes, then how much is the repurchase amount), separately. However, this approach overlooks the fact that, in practice, firms most likely will take both decisions into consideration simultaneously. We argue that to ignore simultaneity features in repurchase decisions could lead to suspicious conclusions. In this study, we incorporate the two related decisions referenced above into a panel data sample selection model and analyze the determinants of stock repurchases. Further, we test whether managers make use of inside information in determining the timing of repurchases. We first find that the decision whether to repurchase is correlated with the decision of how much to repurchase. This finding supports the position that the omission of either decision when analyzing the data could lead to incorrect inferences. Second, we find cash, leverage, and market-to-book (MKBK) ratios are the most important factors related to firm repurchase transactions. More importantly, we find that leverage plays the key role in determining the dollar amount of repurchase. That is, financial structure is a firm's main concern when facing a repurchase decision. Third, we find that the larger the firm size is, the greater the amount of stocks firms will repurchase. Finally, we find that earnings shock plays no role in the decision to repurchase.