Sacrificing Corporate Investment for Stock Repurchases: Are Family Firms Different?

Abstract

Recent changes to the US tax code have increased stock repurchases by US firms. Critics state and existing research provides evidence that firms forego valuable investment to repurchase stock for short-term stock price increases, benefiting managers whose compensation is closely tied to the firm's stock price. Firms for which the founding family is involved have been shown to have longer horizons regarding investment decisions. This study examines the repurchase and investing behavior of 831 firms for the period 2006 through 2015. The results provide evidence that firms decrease investment in employment and research & development concurrently with stock repurchases. Family firms, however, are less likely to repurchase shares during the period and, when they do, have a lower propensity to decrease investment in capital expenditures, employment, and research & development compared to films that do not have a founding family presence.