Alice A. Bonaime

Financial Flexibility, Risk Management, and Payout Choice

Both risk management and payout decisions affect a firms financial flexibility—the ability to avoid costly financial distress as well as underinvestment. We provide evidence of substitution between hedging and payout decisions using samples of both financial and nonfinancial firms. We find that a more flexible distribution, favoring repurchases over dividends, is negatively related to financial hedging within a firm, consistent with financial flexibility in payout decisions and hedging being substitutes. Our findings, which are robust to controlling for the endogeneity of hedging and payout choices, suggest that payout flexibility offers operational hedging benefits.

Capital Structure, Equity Mispricing, and Stock Repurchases

We evaluate motives for share repurchases using a unified framework where a firm has a target capital structure and has equity that can be mispriced. We document that capital structure adjustments are a value-increasing motive for repurchases and that the extent to which adjusting capital structure through a repurchase creates value depends on the undervaluation of the firm. Underlevered and undervalued firms enjoy the greatest economic gains from a repurchase, as evidenced by the stock price reaction to the repurchase announcement, and these firms are more likely to announce a share repurchase program.

The Timing and Source of Long-Run Returns Following Repurchases

This paper investigates the timing and source of anomalous positive long-run abnormal returns following repurchase authorizations. Returns between program authorization and completion announcements are indistinguishable from zero. Abnormal returns occur only after completion announcements. Long-run returns are largely attributable to announcement returns at subsequent authorizations and takeover attempts, i.e., anomalous post-authorization returns are not persistent drifts but rather step functions. These findings have important implications for prior papers examining this most persistent and widespread anomaly. Further, our results serve to refocus the search for a rational explanation for the anomaly on subsequent repurchase announcements and takeover bids.

Mobile dental units: leasing or buying? A dollar‐cost analysis

INTRODUCTION The decision to acquire a mobile dental unit is based on a standard capital budgeting analysis. The next step is to determine whether to obtain the use of the mobile dental unit by borrowing and purchasing or by leasing. As a financing mechanism, leases are simply another way of borrowing money to pay for the asset. OBJECTIVE To compare lease vs. debt as financial vehicles to acquiring a mobile dental unit. METHODS An estimate for a new mobile unit was obtained. Lease and loan proposals from financial lenders were collected. A cost of capital rate was chosen for comparison. Cash flows associated with borrowing and leasing vs. buying were determined fortwo different scenarios: for profit (FP) vs. not-for-profit (NFP), at 5 years. A dollar-cost analysis was utilized to determine the option with the lowest capitalized value. RESULTS There was a net advantage to buying vs. leasing for both for FP and NFP organizations. Due to tax advantages, owning and leasing were substantially less expensive for FP than for NFP. Slight decreases in the monthly lease payments would make leasing competitive to the buying approach. CONCLUSION Exploring alternative financing vehicles may allow dental programs to expand their services through the acquisition of a mobile unit. Though programs generally own assets, it is the use of the asset which is important rather than the ownership. Dental programs can find leasing an attractive alternative by offering access to capital with cash-flow advantages.

Commitment versus Financial Flexibility in Payout Decisions: Evidence from 10b5-1 Preset Repurchase Plans

We are the first to document and study the use of Rule 10b5 1 preset repurchase plans. Though the Rule’s original intent was to clarify conditions for enforcing insider trading laws, generally thought to apply to individuals classified as firm insiders, we find strong use of the Rule at the firm level to repurchase company stock. We exploit this new and widespread form of payout to examine an issue at the core of payout decisions—the tradeoff between commitment and financial flexibility. Relative to open market repurchases, preset plans provide an expanded repurchase window and increased legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption: Firms with alternative sources of financial flexibility are more likely to pre-commit to a repurchase plan, as are firms with a history of poor repurchase timing and firms constrained by blackout windows. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates, with more positive market reactions, and with more dividend substitution than open market repurchases. Lastly, we find that preset repurchase plans represent a unique payout tool whose introduction encouraged a different set of firms to buy back stock and significantly altered the payout landscape.

Commitment versus Financial Flexibility in Payout Decisions

We are the first to document and study the use of Rule 10b5 1 preset repurchase plans. Though the Rule’s original intent was to clarify conditions for enforcing insider trading laws, generally thought to apply to individuals classified as firm insiders, we find strong use of the Rule at the firm level to repurchase company stock. We exploit this new and widespread form of payout to examine an issue at the core of payout decisions—the tradeoff between commitment and financial flexibility. Relative to open market repurchases, preset plans provide an expanded repurchase window and increased legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption: Firms with alternative sources of financial flexibility are more likely to pre-commit to a repurchase plan, as are firms with a history of poor repurchase timing and firms constrained by blackout windows. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates, with more positive market reactions, and with more dividend substitution than open market repurchases. Lastly, we find that preset repurchase plans represent a unique payout tool whose introduction encouraged a different set of firms to buy back stock and significantly altered the payout landscape.

What Is Revealed When Firms Repurchase Against Short Selling

Though short sellers on average succeed at identifying overvalued equity, firms often signal disagreement with short sellers by repurchasing stock when short interest increases. We investigate whether this disagreement reflects a myopic defense of inflated prices, or positive private information. These repurchases appear motivated by managers’ private information, not agency issues, even when managerial benefits to short-termism are enhanced or monitoring is weaker. Managers’ informational advantage relates to subsequent news, earnings, and risk, but is attenuated if activists target management or insiders sell. A trading strategy based on our findings earns 7.5% annually.

Commitment and Financial Flexibility in Payout Decisions: Evidence from Rule 10b5-1 Preset Repurchase Plans

We are the first to document and study the use of Rule 10b5 1 preset repurchase plans. Though the Rule’s original intent was to clarify conditions for enforcing insider trading laws, generally thought to apply to individuals classified as firm insiders, we find strong use of the Rule at the firm level to repurchase company stock. We exploit this new and widespread form of payout to examine an issue at the core of payout decisions—the tradeoff between commitment and financial flexibility. Relative to open market repurchases, preset plans provide an expanded repurchase window and increased legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption: Firms with alternative sources of financial flexibility are more likely to pre-commit to a repurchase plan, as are firms with a history of poor repurchase timing and firms constrained by blackout windows. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates, with more positive market reactions, and with more dividend substitution than open market repurchases. Lastly, we find that preset repurchase plans represent a unique payout tool whose introduction encouraged a different set of firms to buy back stock and significantly altered the payout landscape.