Do Share Repurchases Crowd Out Investment? Evidence of R&D Investment Distortion

We show that the manager of a sufficiently undervalued firm is incentivized to allocate financial slack for a share repurchase to gain an immediate, risk free, and corporate tax free wealth transfer from uninformed shareholders, instead of undertaking a real investment with long term, risky, and taxable payoff. We also find U.S. firms reduce their R&D intensity by more than one-fourth during irregular repurchases, and the evidence does not support the latter is due to diminished investment opportunities. Evidently, financial slack at an undervalued firm does not necessarily alleviate the underinvestment problem as proposed by Myers and Majluf (1984)