This paper uses data from experiments measuring risk attitudes of Ghanaian manufacturing firm managers to investigate the extent to which more risk averse managers who face high risks attempt to smooth profits at the expense of lower average profits. Firms can smooth profits by, for example, making conservative production or input choices, diversifying economic activities, or investing in flexible inputs and types of capital. These are ways for firms to attempt to protect themselves from adverse profit shocks before they occur. The benefits to risk-averse producers in terms of lower profit variance do not come without opportunity costs, however. As is well known from a mean-variance approach, since expected profits typically must be sacrificed for lower risk, profit smoothing will be costly.
Following from insights in the agricultural household literature, profit smoothing will be more likely to occur when firms anticipate being unable to borrow or insure. Since credit and insurance markets in Africa tend to be weak, one can expect that profit smoothing may be particularly prevalent in African firms. This implies that the costs of risks will be high in Africa and that African firms present interesting cases to study these mechanisms.
The idea of business cycle accounting (BCA hereafter) developed by Chari, Kehoe, and McGrattan (2002, 2004, 2007a) is to assess which wedge is important for the fluctuation of an economy which is assumed to be described as a prototype model with time-varying wedges. These wedges resemble productivity, labor and investment taxes, and government consumption. Since these wedges are measured using the production function and first order conditions to fit the actual macroeconomic data, this method can be interpreted as a generalization of growth accounting.
Early share repurchases made substantial use of fixed price tender offers and Dutch auctions with event returns of 10% to 15%, signaling undervaluation. During the 1980s, buybacks were mostly open market repurchases (OMRs) with high positive event returns whose persistence may be related to subsequent repeated announcements occurring every 1 to 3 years. Studies of share repurchases during the 1990s are consistent with the hypothesis that a major motive was to offset the dilution effects of the exercise of stock options. These findings were also supported by the public statements of major companies that share repurchases were used to support their stock prices and by reductions in equity shares outstanding over the years by many firms. The growth of share repurchases took place after 1980 when the number and percentage of firms paying dividends decreased.
Dividend payers were predominantly large, mature firms. Also earnings and dividend payments were concentrated in 25 firms which accounted for over 50% of the totals for all industrials by 2000. A relatively small number of firms also accounted for a high concentration of share repurchases by the late 1990s. Early repurchases moved stock valuations toward their intrinsic values; later repurchase programs may have contributed to overvaluation and over investment.
