• Shareholder heterogeneity: Companies with a high degree of diversity in shareholder valuations (that is, small companies with a small number of shareholders) prefer a fixed-price offer or a special dividend. Conversely, companies with a low degree of diversity in shareholder valuations (that is, large companies with a large number of shareholders) prefer a self-tender offer or an open market share repurchase. The former are more likely to select a pay-out method where the informational cost is low, whereas the latter are more likely to select a pay-out method that calls for more insight into the value of the shares.
• Agency costs: Companies with high director ownership levels and high debt are less likely to select an open market share repurchase (which could suggest a conflict of interest with general shareholders), whereas companies with low director ownership levels and low debt are more likely to prefer an open market share repurchase as it would better align directors’ interests with other shareholders’ interests.
• Dividend payment history: Investors who are interested in earning investment income (that is, dividends) will invest in companies that have high dividend pay-outs. However, where financial flexibility is important, companies will probably choose to use up excess cash by repurchasing shares in the open market rather than increasing dividends because if a potential investment or acquisition opportunity were to present itself, it would be less damaging to shareholder confidence if the company were to curtail a share repurchase than cut dividends.
• Size of distribution: In the case of small pay-outs, companies tend to choose a special dividend. However, for large pay-outs the preference is more likely to be self-tender offers followed by open market share repurchases.
• Level of company valuation: Where companies are significantly undervalued, their preference is for a fixed-price offer over an open market share repurchase, as it would send a reassuring signal to the market about the true value of the shares. Although special dividends could also be used to create a favourable impression of a company’s worth, share repurchases have been shown to be more effective than special dividends in boosting the share price.
• Share price performance: Companies whose shares are not performing well are more likely to select a fixed-price offer over an open market share repurchase, thereby mitigating the risk of a disappointing response from the market.
• Takeover threat: Companies facing the threat of a takeover are more likely to opt for an open market share repurchase or self-tender offer than special dividends when there is a high level of diversity in shareholder valuations. Shareholders who would be willing to tender are those with the lowest valuations, which would raise the cost of a takeover and act as a deterrent.
• Management share options: Companies whose management enjoys share options are more likely to repurchase shares than to pay dividends, since share repurchases will increase the value of the options that they hold and also their ownership in the company.

‘Share repurchasing could signal a dearth of profitable investment opportunities or suggest that the company lacks confidence in its short-term financial prospects.’