The effect of share repurchases on corporate investment policies: The South African experience

Abstract

Orientation: The study analysed the investment behaviour of companies that enter into share repurchases.

Research purpose: The study examined the effect of share repurchases on corporate investment policies for companies listed on the Johannesburg Stock Exchange (JSE).

Motivation for the study: Empirical evidence suggests that companies repurchasing shares subsequently reduce their investment in employment, capital, and research and development. South Africa is a developing country with slow economic growth and high unemployment rates. Share repurchases have increased over time, but studies have not yet analysed the effect of share repurchases on investment policies in this country.

Research design, approach and method: The study applied a panel regression analysis technique to establish the effect of share repurchases on investment policies of JSE-listed companies. The sample comprised the 108 companies (listed in sectors other than basic materials and financials) that repurchased shares during the period 1999–2009.

Main findings: When growth opportunities are available, JSE-listed companies increase research and development expenditure.

Practical/managerial implications: The practical implication is that South African share repurchases should not be discouraged because companies repurchasing shares also increase their investment in future growth. The policy implication is that South African share repurchase regulations differ from global practice, which may affect the assessment of investment behaviour of companies that enter into share repurchases.

Contribution/value-add: Contradictory to global evidence, this study revealed that South African share repurchases have a positive effect on corporate investment policies. Investment and share repurchase behaviour may well be country-specific.