Do Share Repurchases Crowd Out Internal Investment in South Africa?

Researchers in developed countries have questioned whether share repurchase activity influences internal investment. The aim of this study was to investigate the relationship between share repurchases and internal investment (defined as capital expenditure, employment expenditure, and research and development) in South Africa, as little was known about this relationship in developing countries. A quantitative research methodology was followed, employing the data of South African listed companies during the 2002-2017 period. A significant negative relationship was noted between share repurchases and employment expenditure when considering all companies, while high-growth companies exhibited a significant negative relationship between share repurchases and capital expenditure. The negative relationships could indicate that companies increase share repurchases to the detriment of internal investment (especially employment). Alternatively, it may imply that share repurchase and internal investment decisions are determined simultaneously, with companies decreasing internal investment and increasing share repurchases in the absence of identifiable profitable projects (or increasing internal investment and decreasing share repurchases when growth opportunities are available). These findings could be useful to shareholders, corporate governance regulators and activists. Given the high unemployment and income inequality in South Africa, the results support a call for the improved regulation of share repurchases to ensure effective monitoring.