Using Tobin's Q Ratio To Assess the Strategy of Repurchasing Shares

Does the implementation of a share repurchase strategy create long-run firm value? Do companies initiating a strategy of repurchasing shares outperform companies not implementing this strategy? These two questions provide the foundation for this empirical study. An objective of the study is to use Tobin's Q ratio to determine if there is a change in the pre and post performance of companies with stock repurchase programs. A second objective is to determine if companies that repurchase shares outperform companies that do not repurchase shares, based on the performance of Tobin's Q ratio. A large sample of repurchasing companies is compared to a matched sample of companies not repurchasing shares. The sample data covers the period 1976 through 1995. The findings weakly support the hypothesis that a repurchasing strategy resulted in an improvement in firm performance, as reflected in a higher Tobin's Q ratio. This finding is contrary to a recent study. The results did not support the hypothesis that firms repurchasing shares would have a higher Tobin's Q ratio than firms not repurchasing shares. In response to the two fundamental questions posed in the opening statement, we conclude that the study provides very weak support for the signalling hypothesis. We also conclude that companies implementing repurchase strategies do not outperform non-repurchasing companies. JEL classification: G320