The Effectiveness of Open-Market Share Repurchases as a Method of Reducing Agency Costs and Tax Burden Simultaneously

This study shows that payout policy depends on the market expectation of the repurchase completion rate, within the context of the free cash flow hypothesis. Our model formulates that the amount of agency costs that are unlikely to be reduced discounts the share price at the announcement of payout policy. The possibility of not buying back overvalued shares lowers the market expectation of the repurchase completion rate and increases the share price discount. When the share price discount is sufficiently large, investors do not prefer share repurchases to dividends and fail to reduce agency costs and tax burden simultaneously