The integration of share repurchases into investment decision-making: Evidence from Japan

Share repurchases have become a significant global transaction and skepticism persists about their ambiguous effect on investment. We enter this debate motivated by inconclusive relevant empirical evidence and the remarkable evolution of share repurchases in Japan. Accordingly, we explore the investment-share repurchases nexus using panel data from Japanese listed firms between 2000 and 2019. We document a negative relationship consistent with the notion that firms curtail repurchases in the presence of investment spending and vice versa. We establish this contention by using subsamples stratified according to financing constraints, growth opportunities and cross-shareholdings. The findings endure after controlling for self-selection, endogeneity and heterogeneity and suggest that firms' investment decision precedes share repurchases which are adjusted accordingly. The results highlight how the widely criticized feature of cross-shareholdings, which is a distinct trait of the Japanese market, affects the integration of share repurchases into investment decision making.