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Current Business Research Project Paper Sarah Stine RES/341 January 9, 2012 Dr. Annette West

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Abstract:

The fundamental premise of corporate finance is that the decisions of the managers (agents) should lead to value maximization for their shareholders (principals). When firms have excess cash flow, managers have to choose among the various alternatives for use of the funds, i.e., investments, operations, and cash payout (dividends and repurchases). The principal mechanisms used by firms to distribute excess cash flow and avoid agency conflict are dividends and share repurchases, with an increasing percentage going to repurchases. This study examines the use of share repurchases by banking firms to signal the market about future operating performance (signaling hypothesis), and to reduce agency conflicts (cash flow hypothesis). Previous empirical studies in the non-financial sector have shown weak support for signaling hypothesis and strong support for cash flow hypothesis. The results of this study show strong support for cash flow hypothesis, similar to the non-financial sector. However, the use of repurchase as signal by banking firms does not coincide with superior future performance, contradicting the results obtained in the non-financial sector (Raghavan K. R., 2005). This study also examined the data on the banking firm's operating performance relative to its record of satisfying prior repurchase commitments before announcing new programs (time inconsistency hypothesis) during the study period. The results of the analysis do not support time inconsistency hypothesis, contradicting the results in the non-financial sector.

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Current Business Research Project Paper The article chosen examines shows the use of share repurchases by banking firms to signal the market about future operating performance (signaling hypothesis), and to reduce agency conflicts (cash flow hypothesis). Business Research and Purpose The actual purpose of business research as mention in this article is connected to the whole conclusion of the firm’s economic confirmation pertinent to the product of obtainable portion repurchase. This article implies there are two key subject matters being utilized in the firm’s statistics. The financial firm’s organizational group wants to indicate to the marketplace regarding upcoming presentations on the firm, as well as, stipulate the influence on turbulent development with administrative and confederate choices in share repurchase determinations. The fundamental premise of corporate finance is that the decisions of the managers (agents) should lead to value maximization for their shareholders (principals) (Raghavan K. R., 2005). Explaining Business Problems under Investigation The problem in analysis wavers per manager’s conclusion is to distribute evident subsidy as well as stocks, lacking impediment on the firm’s operational, accomplishment functioning examination in economics and inventory. Once firms own extra cash flow, management has to select amongst the various substitutes for use of the funds, i.e., investments, operations, and cash payout (dividends and repurchases). The principal mechanisms used by firms to distribute excess cash flow and avoid agency conflict are dividends and share repurchases, with an increasing percentage going to repurchases (Raghavan K. R., 2005). This study examines the use of share repurchases by banking firms to signal the market about future operating performance (signaling

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hypothesis), and to reduce agency conflicts (cash flow hypothesis) (Raghavan, 2004). Describing Data Collection Methods This study examined the data on the banking firm's operating performance relative to its record of satisfying prior repurchase obligations before announcing another program (point in time unpredictability hypothesis) during the study period. The results of the analysis do not support point in time unpredictability hypothesis, undermining the outcome of the non-financial area. When testing the proposition hypothesis imitated after previous inquiries, numerous deterioration and organizational deterioration styles were regression and logistic regression models were used. Conclusions on research with results “The obtained results lead to the following conclusions: (1) Cash flow and institutional ownership have a strong positive relationship to firm's operating performance, while leverage, asset size and market to book value ratio affect it negatively; (2) Size of repurchase and performance in satisfying prior repurchase commitments do not an have impact on the operating performance, contradicting the results of the signaling and time inconsistency hypotheses from the non-financial sector; (3) Executive options, transient cash flow and institutional ownership play a significant role in influencing management choice of repurchase over dividends in banks of all sizes, confirming the substitution hypothesis; (4) Total options do not show predictive ability of repurchases, contradicting the option funding hypothesis; and (5) Deferred tax expense and institutional ownership show significant positive impact on the likelihood of earnings management in banks, consistent with prior research in the non-financial sector” (Raghavan, 2004).

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Summary This paper presents an empirical analysis of firms’ rationale traditional open market repurchase programs. Using a hand-collected sample of firms choosing to repurchase their own stock using ASR programs, five hypotheses were tested regarding firms’ rationale for using ASR programs: the distribution of excess cash hypothesis, the signaling or undervaluation hypothesis, the target leverage-ratio hypothesis, the takeover avoidance hypothesis, and the management compensation hypothesis. The results found that find that firms undertaking ASR programs are significantly larger than those undertaking OMR programs, and that ASR programs have larger median deal values than OMR programs (Zhang, 2009).

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References Raghavan, K. (2004, August).The effects of stock repurchases on long-term operating performance in banking firms: An empirical study. D.B.A. dissertation, Cleveland State University, United States, Ohio, Retrieved January 4, 2012, from Accounting & Tax Periodicals. (Publication No. AAT 3150950) Raghavan, K. R. (2005, Oct-Nov). Do executive options promote share repurchases? When firms have excess cash flow, managers have to choose amoung several alternatives to deploy to cash to add value to the firm. Retrieved January 8, 2012, from Bank Accounting & Finance: Volume 18 Zhang, T. (. (2009, November 3). Social Science Research Network. Retrieved January 8, 2012, from Why do Firms Undertake Accelerated Share Repurchase Programs?: http://papers.ssrn.com