Excess cash and share repurchase effects

Abstract

In this paper, we examine the impact of excess cash on firm decisions about accretive share repurchases-those increasing earnings per share (EPS) by at least one cent-and the impact of these repurchases on firm investments and value. Employing a fuzzy regression discontinuity design, we find that firms with excess cash are more likely to conduct accretive share repurchases when they would otherwise have had to announce a negative EPS surprise. Instead, we find that they tend to cut future investment after the accretive share repurchase while maintaining the existing cash level. We also find that the value of excess cash to the firm declines when firms expend it on accretive share repurchase.