The dark side of stock repurchases: do they affect marketing capabilities?

Abstract

Purpose

This study aims to investigate the effect of stock repurchase – firms buying back their own stocks – on firm performance, focusing specifically on the role of marketing capability. The authors also investigate the moderating influence of competitive intensity on this effect. This research sheds light on how marketing capability explains the negative effect of stock repurchase on firm performance, and how this effect varies in different competitive intensity environments.

Design/methodology/approach

The authors test their hypotheses using US firm-level longitudinal data collected from a sample set of firms obtained from the Compustat database for the 1989–2015 period. The authors specify a panel data regression model to test the hypotheses.

Findings

The authors find that adoption of stock repurchase ultimately results in a decrease in firm performance, through a decrease in marketing capability. The authors also find that the indirect effect of stock repurchase on firm performance is moderated by firm competitive intensity, such that at higher levels of competitive intensity, the negative relationship between stock repurchase and marketing capability will become amplified and at lower levels of competitive intensity, the negative relationship between stock repurchase and marketing capability will get attenuated.

Research limitations/implications

This study indicates that the risk from stock repurchase is the diversion of funds from other beneficial activities such as marketing budgets, leading to lowered marketing capability.

Practical implications

This study's results will help managers improve their understanding of the dark side of the stock repurchase strategy and help take corrective action.

Originality/value

The present study empirically tests the effects of stock repurchase on marketing capability and firm performance.

Citation

Wen, Y., John-Mariadoss, B., Umesh, U.N., Sa Vinhas, A.S. and Kuzmich, D. (2024), "The dark side of stock repurchases: do they affect marketing capabilities?", European Journal of Marketing, Vol. 58 No. 10, pp. 2358-2389. https://doi.org/10.1108/EJM-06-2022-0440