Share Repurchase and Taxation among UK Companies

Sh atomic number 18 Re secure and Taxation among UK CompaniesThe aim of the question project is to examine the race in the midst of donation taint hold up and revenue enhancement in the UK companies.Project ObjectivesTo examine the motivations of piece purchase in the get together Kingdom.To dismember the recent trend in c ar buys over get 20 decades among UK companies.To explore the human relationship betwixt deals redemption with levyation in the UK companies.To explore the pretends of revenueation on theatrical role purchase application for UK companies scopeFor decades, most of the corpo circumscribes are preferred to pay tabu property in the form of dividends quite a than contri justion purchases, despite the relative task proceeds of cracking dupes over ordinary income. In some countries, such as U.S. and UK, companies send away buy back their bear apportions in the impart market, alike known as a grapple repurchase. In the travel 20 de cades, touch buybacks become extremely popular in the coupled States. check to aggregate data from Compustat, companies inform share repurchases ontogenyd from 4.8 percent in 1980 to 41.8 percent in 2000, while dividends whole grew at an average yearly rate of 6.8 percent (Grullon Ikenberry, 2002). Re awaiters also rig that during 1985 to 1999, corporations in the U.S. announced intentions to repurchase about $750 billion of stock (Vermaelen Rau, 2002). Moreover, studies show that from 1999 to 2000, industrial warms spent more(prenominal) money on share repurchases than on dividend pay out, and that is the first in history, share repurchases programs have become more popular than dividends (Grullon Ikenberry, 2002).What are the reasons for the companies buy back their own shares. Jensen (1986) pointed that squiffys repurchase stock to distri scarcelye tautologic exchange flow. A share repurchase distributes cash to existing shareholders in modify for a fraction of the firms outstanding equity. This hypothesis has been supported by Stephens and Weisbachs (1998) battleground. They found share buy backs have a positive relationship with the aim of corporation cash flow. Moreover, they also found a negative relationship between share repurchase and prior stock returns, which way of life, firm repurchase when their share tolls are under treasured in stock market. This theory has been supported by Vermaelens (1981) study. He found that firms repurchase stock when they are undervalued and have the excess cash to distribution. In subsequent studies, inquiryers pointed that firms whitethorn repurchase stock to ontogeny their leverage ratio (Opler and Titman, 1996).For the appraise perspectives, lookers pointed that revenue changes have a study pertain on share repurchase. In the UK, companies are sensitive to tax environmental changes. For example, studies shows that in 1994, in that respect were strong growth in the subroutine of op en-market stock repurchase programs. This cause by the introduction of tax successful agency share repurchases programs (Vermaelen Rau, 2002). But in 1996, when the tax credit stipulation to tax exempt pension funds in agency buybacks was abolished, the outlet of the companies announced share repurchase fell significantly. However, in 1997, when all tax credits were abolished, share repurchase became popular again.As some demonstration showing above, share repurchase become more popular than either time in the history. Researchers stated that the majority of companies start to use cash payouts to shareholders through share buybacks rather than cash dividend (Grullon Michaely, 2002). in that respectfore, it is consequential to better recognise the motivation behind the recent surge in share repurchase activity. Although, share buy backs growing popularity, most of the established studies centralize on the U.S. firms. Whether the share buybacks in UK as popular as in the U .S., because the divergent of tax and regulation systems between this two countries. The aim of the question go out not only enhance our understanding of corporation pay out policy but also examine the share repurchases programs under UK gross system and how this impacts effect on UK companies payout strategies.Moreover, the reason for me to focus on the UK companies rather than other EU companies because there have lacks of share repurchase activities in Europe countries. jibe to the Securities Data Corporation (SDC) reports shows that during 1980 to 1998, there were only 489 stock buybacks announcements made by European companies. And nearly 60% of those announcements were made by the UK companies. There have various reasons for the lack of share buy back activities in EU companies. Firstly, share repurchase is still il well-grounded in some European countries, such as France and Germany. Secondly, some countries proposed specialised tax provisions to discourage share buy b acks. For example, in Netherland have the gritty taxes on dividends and low taxes on neat gains. Thirdly, the share repurchase do not fit European federation culture. Traditionally, most European companies focus on maximizing stakeholders value rather than shareholders value (Vermaelen Rau, 2002). Moreover, in European countries the stakeholders (such as managers, banks) prefer to maximize the size of the companies rather than focus on stock prices. They are not interested in share repurchase. Finally, there are little relative studies examine the relationship between share repurchase and receipts with UK companies.Literature look backward4.1 IntroductionThis search focuses on share repurchase and tax revenue among UK companies. Bibliographic database utilize were Business stock Premier (EBSCO), Econo Lit with Full Text (EBSCO), JSTOR Business, Psyc ARTICLES (CSA), Science Direct and Swets Wise. The lucubrate of these and full text database were searched in Table 1. The t otal numbers of retrieved binds were 30. Keywords used were dividend, share repurchase, buybacks, payout policy, dividend policy, taxation and regulation with confine to academic journals and non-academic articles on the last 20 geezerhood.4.2 Motivations of share buy backsThere are number of reasons a firm repurchase stock. First, Share repurchase could improve the retained profits. Because when companies purchase their own shares, the remaining number of shares left in the public bequeath lower. The reduction of shares in the public means the earning per share allow for addition even the profits remain the same. So when companys share price undervalued, repurchasing shares whitethorn still result in a strong return on investment.Secondly, firms may use share repurchase announcements to signal the market that their shares are undervalued and the positive stock price reaction at the announcement of share repurchase should correct the misevaluations (Dann, 1981 Vermaelen, 1981 ). However, Ikenberry, Lakonishok, and Vermaelen (1995) argued that this increase may not be able to correct the misevaluations, particularly in the open market share repurchase- programs. According to Stephens and Weisbachs (1998) study, they investigated on 450 open-market share repurchase programs in the U.S. between 1981 and 1990. They found that between 74% and 82% of the shares targeted at the time of announcement are later repurchased and this actual share buybacks are negatively related to stock price performance after the stock repurchase.Thirdly, share repurchase may increase the leverage ratio. The leverage ratio go forth increase when a firm distributes its capital. Therefore, assuming that an optimal leverage ratio exists, a firm may more likely to buy back their own shares when their leverage ration is below the target ratios (Bagwell Shoven, 1988).Fourthly, companies where there are few opportunities for growth, share repurchase may the practicable way to improve the earning per share in straddle to meet executives or managers targets. Thus, companies structures may affect their decisions to buy back own shares.Finally, share repurchase consider a takeover more expensive. Because share buybacks avoid the accumulated amount of cash in the firm, when a firm with a strong cash position but needs trammeled spending on capital will accumulate cash on balance sheet, therefore, it make the firm more attractive for takeover.However, recent studies shown share repurchases are only benefit shareholders wealth in the short term, but do not add any long term value to the company (Guay and Harford, 2000). Eberhart and Siddique (2003) did a survey based on 7,079 share repurchase programs between 1981 and 1995. The results showed that after the share buybacks, there were a middling increase in the number of share outstanding. Often the share purchases in the share buybacks programs are used for employee stock options and stock grants. As one article su ggested, share repurchases in general are just backdoor compensation? for company employees (Henry, 200674).4.3 Taxation with share repurchasesTax changes have a major impact on share repurchase. Study shows that in 1994, there were significant increases in the number of open-market stock repurchasing programs cause by the introduction of tax-favored agency share repurchase programs (Vermaelen Rau, 2002). Grullon and Michaely (2000) also find that the differential tax between capital gains and dividends is a significant determinant of the market reaction to share repurchase announcement. Grullon and Michaely (2002) pointed that in the U.S., corporations start to substitute share repurchases for dividends because capital gains are taxed at more favorable rates than ordinary income. They found that even in 1986, the Tax Reform Act greatly reduced the relative tax advantage of capital gains, but there was still a significant positive difference between the marginal rate on ordinary in come and the marginal rate on capital gains.Raghavendra and Vermaelen (2002) studied on the relationship between taxation and share buybacks among the UK companies. In their studies, the result showed that buyback activity increased significantly when the agency buybacks introduced during 1990 to 1998 in the UK. This consistent with the hypothesis that taxation has a significant effect on share buybacks. Moreover, they also pointed that the powerfulness of pension fund to recover dividend credits has a major impact on the buyback activity in the UK (Raghavendra and Vermaelen, 2002).However, some interrogationers have argued that taxes alone(predicate) do not explain the extent of repurchases activity in the U.S. Brav at al (2005) stated that managers view tax considerations as of second important factor in the choice if disbursement mechanism. Ikenberry et al (2004) suggested that since the tax changed in 2003 in the U.S., the dividend had increased significantly. He also pointed that although dividends in the U.S. remain slightly tax disadvantages, that due to the delay of the capital gains by the investors.However, based on the results from research conducted in the U.S., the extent to whether the taxation dominant the managers decisions announce share repurchase rather than dividends is still an unresolved issue.4.4 Regulation framework in the UKIn order to better understanding the effect between taxation and share repurchase among the UK. It is important to develop our knowledge in the legal and tax frameworks governing U.K. share buybacks, moreover, to recognize the difference between these frameworks and those in the U.S.In The UK, share buybacks allow the company to manipulate its stock price. In order to avoid the share repurchase reduce creditors benefits, the Companies Act states that only distributable profits or the proceeds of fresh issue of share can be used to finance the purchase. Moreover, the companies are not allowed to announce share rep urchase programs during the period when directors are not allowed to trade in their companys shares. This means that in the UK, share repurchases are not allowed in the 2 month period preceding the publication of annual earnings. Finally, compare with the U.S., in the UK, share repurchase are much less flexible tool for capital management. All the firms buy-backed shares may ask to cancelled, because the UK regulators more concerned about the preemption rights of shareholders (Vermaelen Rau, 2002). Not like in the U.S., the regulators more concern about the treasury stock?, such as repurchased shares can be re-issued without shareholder approving (Vermaelen Rau, 2002).ConclusionThere are various reasons for firms to announced share repurchase, although share buyback activity become extremely popular in the U.S., but the UK repurchase scene is different from the U.S. scene in many respects. Although the UK is the European country where buybacks are most popular, but it is still relatively crushed numbers of share repurchase programs announced compare with the U.S., where about degree Celsius U.S. firms announce open-market share buybacks each month. However, the UK taxation system may make share repurchase less attractive than they are in the United Stated. What the impact of taxation system on share repurchase announcement among UK companies? How these impacts affect UK companies in last 20 years? Which industry is more likely to announce share repurchase program? The proposed research will review the potential relationship between taxation and share repurchase among UK companies.5 Research Method5.1 Desk Based ResearchThe desk based research used to my study. Because desk based research is very useful to get a broad understanding of the topics and is relatively easy to use (Bryman and Bell, 2003). The data normally used in desk based research is referred to as secondary and complicates appeal data from third party sources such as company website, s nip articles, books, journals, promulgateed statistics and marketing research reports (Collis Hussey, 2003). There are many advantages to utilise secondary research. This includes the relative ease of access to many sources of secondary data with little or no cost to acquire. The use of secondary research may suffice researcher to clarify the research question and help align the focus of large scale primary research. However, there are also some disadvantages of using secondary research. Sometimes, secondary data may not presented in a form that exactly meets the researchers need and the research may not get the full details of the research to gain the full value of the study. Moreover, with companies competing in fast moving industries, the secondary research may out of realise have little or no relevance to the current market situation.5.2 Reasons of using Desk Based ResearchThere are several reasons for me use desk based research. First, there is a awe-inspiring amount of l iterature available, but limited studies focus on the taxation and share repurchase among UK companies. Therefore, the desk based research may help me to limit the articles to focus on my research topics. Second, the desk based research may possible to obtain companies annual report and account from companies websites. Because the UK Companies Act (2006) requires all quoted companies to publish their annual reports available on their website. (CA S430). Finally, in order to explore the relationship between taxation and share repurchase among UK over 20 years. The specific data need to be obtained, such as market-to-book ratio, return in capital employed, equity to debt ratio, market value.All of that information could obtain through on-line data base, such as Data Stream, which can be used in Aston Universitys library.However, some of the information may out of date or the results may not be directly related to UK companies situation. And the amounts of information available may be very limited. Also, due to the lack of study on relationship between taxation and share buybacks under UK taxation system, it is difficult to find sufficient sources from limited useful information.5.3 Sample partitioning and Analysis MethodThe company shares repurchase announcement information been gathered between 1 January 1999 and 31 December 2009. The information obtained from various ways, including capital of the United Kingdom Stock Exchange (LSE) online service, UK-wire Company Announcement service, news articles from the Financial Times. The autarkical variables of stock returns and data have been provided by DataStream.Moreover, the data and ensample had to suffer the following criteriaThe repurchase must exclusively be ordinary sharesThe firms is listed in the UKRepurchases announced during the last quarter of 2001 are excluded to dampen the volatility cause of 11 September 2001.Only the first announcement of share repurchase programme is included.The sample include s all open market share repurchases, reclusive repurchasesDescriptive statistics of the repurchases and independent variables used in this study to summarize and ready the companies repurchase data. Then, the main tax regimes divided into four equal periods during the sample period. The repurchases announcement data will be analyzed into the four tax periods. The correlation matrix on the variables will be needed to analyze whether there is the correlation between companys stock returns and share repurchase. Finally, the result will be interpreted and presented.Ethical issuesThe following ethical issues will be conducted with this researchRecode the data and results accuratelyFollow the Aston University rules on buccaneeringDescribe and discuss the research result objectivelyTask discoverTaskProblemsSolutions meet journals and literatures about firms dividend policies, share repurchase and taxation awed amount of literature need to reviewed do search to articles that study on sh are repurchase within UK companiesObtain the information about the firms announced share repurchase programs within the UK for last 20 yearscomparatively small data need collect from numerous informationLimit the research to companies announced share buybacks listed by data stream between 1989 and 2009 in the UKCreate a list of relative UK companiesWhich company should includeThe company announced share repurchase over millionObtain the information about taxation and regulation changes over last 20 years in the UKA lot literatures need to reviewedLimit search to articles about taxation and regulation changes in last 20 yearsFind the impact of taxation change for share repurchases activityA limit studies/result on this area, especially for UK companies.Analyze the data on my own, use the statistical methods to explore the relationship between taxation and firms payout policies. lay aside up reportEasy to exceed 15000 word limit fake with supervisor to only include the most relevant i nformationReview the dissertation before the submit itEasy to make some grammar, spell mistakes.Ask my friend read it, see whether the dissertation make good sense for them. Help me to find the grammar mistake.