Orientation: The study analysed the investment behaviour of companies that enter into share repurchases.Research purpose: The study examined the effect of share repurchases on corporate investment ...policies for companies listed on the Johannesburg Stock Exchange (JSE).Motivation for the study: Empirical evidence suggests that companies repurchasing shares subsequently reduce their investment in employment, capital, and research and development. South Africa is a developing country with slow economic growth and high unemployment rates. Share repurchases have increased over time, but studies have not yet analysed the effect of share repurchases on investment policies in this country.Research design, approach and method: The study applied a panel regression analysis technique to establish the effect of share repurchases on investment policies of JSE-listed companies. The sample comprised the 108 companies (listed in sectors other than basic materials and financials) that repurchased shares during the period 1999–2009.Main findings: When growth opportunities are available, JSE-listed companies increase research and development expenditure.Practical/managerial implications: The practical implication is that South African share repurchases should not be discouraged because companies repurchasing shares also increase their investment in future growth. The policy implication is that South African share repurchase regulations differ from global practice, which may affect the assessment of investment behaviour of companies that enter into share repurchases.Contribution/value-add: Contradictory to global evidence, this study revealed that South African share repurchases have a positive effect on corporate investment policies. Investment and share repurchase behaviour may well be country-specific.
Recent studies report that open-market repurchase announcements have become less attractive to stock investors. This study documents that lower announcement returns are attributed to subsequent ...repurchase announcements, which have increased in number in recent years. Using the real-option-to-delay framework proposed by Ikenberry, D and T Vermaelen (1996). The option to repurchase stock. Financial Management, 25, 9–24, this study finds evidence consistent with decreasing value of the option to repurchase shares prior to subsequent open-market repurchase announcements. This explains the decreasing market reactions to such announcements.
Share buybacks in India Dayanandan, Ajit; Donker, Han; Kuntluru, Sudershan ...
Research in international business and finance,
December 2020, 2020-12-00, Letnik:
54
Journal Article
Recenzirano
We examine the market price and liquidity reaction to 239 share repurchase announcements in India. The average abnormal return on announcement day is 2.07 percent. Firms with larger promotor ...ownership stakes experience higher market reactions. Using the Amihud illiquidity measure and volume, we show that liquidity improves after the announcement. Open market repurchase programs increase market liquidity while tender offers do not. Liquidity improves more for high promotor ownership firms. Lastly, shorter duration repurchase programs improve liquidity more than longer duration programs. These results are consistent with our discussion of the pecking order of ownership structure in the low information transparency environment of India.
While positive, long-run abnormal returns following share repurchase announcements are substantially lower when CEOs are overconfident. This effect is particularly strong for (i) difficult to value ...firms, such as small, young, non-dividend paying, distressed, and having negative earnings firms, (ii) firms with poor past stock return performance and high book-to-market ratio, indicators of possible overreaction to bad news, and (iii) financially constrained firms. Overall, these results are consistent with the mispricing hypothesis as a motive for repurchases and as an explanation for the buyback anomaly. Additionally, irrespective of the CEO’s level of confidence, abnormal returns are considerably larger for financially constrained firms, implying their managers require larger undervaluation due to the higher cost of capital.
•The post share repurchase returns are much lower when managers are overconfident.•These abnormal returns differences exist only when stocks are difficult to value.•The findings are consistent with market timing as a motive for repurchases.•For financially constrained firms returns are higher regardless of confidence level.
Purpose
Existing studies show that firms may have an incentive to use share repurchases opportunistically, thereby taking advantage of market participants’ confirmation bias that share repurchase is ...a signal of undervaluation. This study aims to investigate whether signaling costs and accounting transparency can serve as tools to identify opportunistic share repurchases.
Design/methodology/approach
The authors measure signaling costs by using two share repurchase methods (direct and indirect share repurchase) with different share repurchase costs, and measure accounting transparency using the history of earnings timeliness. The authors further measure long-term performance following share repurchases using operating performance and stock returns. Lastly, the authors compare the long-term performances between the groups defined by share repurchase method and earnings timeliness level.
Findings
The authors find that indirect share repurchase firms with a history of poor earnings timeliness experience unfavorable long-term performance, while other share repurchase firms do not. This finding reinforces the view that some share repurchases may be driven by managerial opportunism. In particular, when firms with a history of poor earnings-reporting behavior choose a low-cost repurchase method, their share repurchases may be motivated by managerial opportunism.
Originality/value
The findings suggest that past earnings timeliness and the signaling costs of a repurchase together are useful predictors of false signaling. Moreover, they suggest that investors can – at least in part – predict opportunistic share repurchases by using signaling costs and accounting transparency.
Manuscript Type
Empirical
Research Question/Issue
Low‐quality firms may use share repurchase announcements to send a false or conflicting message regarding firm value to the capital market. This ...study examines whether firm‐level corporate governance mechanisms can alleviate this mimicking behavior by affecting managers' buyback behavior following open‐market share repurchase announcements. I further investigate the extent to which differences in corporate governance affect the changes in insider shareholdings and the degree of information content provided in repurchase announcements.
Research Findings/Insights
Using unique archival data from Taiwan, I find that the capital market reaction to share repurchases announced for the purpose of signaling undervaluation is more favorable for firms with quality corporate governance. The increasing post‐repurchase insider shareholdings confirm the credibility of repurchase announcements for firms with better corporate governance. The buyback outcome subsequent to repurchase announcements is affected by internal corporate governance mechanisms. Furthermore, external monitoring factors, such as having Big Four accounting firms as auditors, listing requirements, and regulatory preset buyback price ranges, also determine the execution rate of repurchase programs.
Theoretical/Academic Implications
The signaling hypothesis, the leading hypothesis on open‐market share repurchases, suggests that low‐quality firms may engage in mimicking behavior to send a false signal regarding firm value when the signal cost is low. This study provides insight regarding the impacts of firm‐level corporate governance structures on the signaling effects of repurchase announcements, the subsequent insider shareholdings, and the completion of repurchase programs. In addition, this study is the first to analyze the influence of corporate governance mechanisms on the degree of information content in open‐market share repurchase announcements.
Practitioner/Policy Implications
This study suggests that higher quality corporate governance mechanisms lend credibility to a firm's open‐market share repurchase announcement, which is also noteworthy in assessing the wealth effect of the repurchase announcements on shareholder value. Moreover, the findings suggest that buyback regulations (e.g., preset buyback price ceiling and floor) in Taiwan influence managers' buyback decisions.
This study is the first examination of daily stock options trading prior to corporate share repurchase announcements. Using a sample of over 2,000 share repurchase announcements in the United States ...during the 1996–2012 period, I find that the average volatility spreads become abnormally high immediately prior to repurchase announcements. Furthermore, the pre-announcement abnormal volatility spreads are positively associated with the repurchase announcement return. The results are robust to different regression specifications and randomization tests. Taken together, my findings suggest that some options market participants are informed about the upcoming repurchase announcements, facilitated by information leakage.
•I examine daily stock options trading prior to corporate share repurchase announcements.
•The average volatility spread becomes abnormally high immediately prior to repurchase announcements.
•The pre-announcement abnormal volatility spreads and option trading volume are strongly associated with the repurchase announcement return.
•Some options market participants are informed about the upcoming repurchase announcements, facilitated by information leakage.
Share repurchases and accounting conservatism Lobo, Gerald J.; Robin, Ashok; Wu, Kean
Review of quantitative finance and accounting,
02/2020, Letnik:
54, Številka:
2
Journal Article
Recenzirano
The prior literature indicates that financial policy (e.g., payout policy) as well as accounting policy (e.g., conservatism) can be used to address incentive problems in firms but finds mixed ...evidence. We conjecture that stock repurchases, an increasingly popular form of payout, and conservatism are potential mechanisms to counter managerial propensity to engage in overinvestment using free cash flows. Consequently, we expect a negative relation between repurchases and conservatism as well as a stronger negative relation between these two mechanisms in firms with high levels of free cash flows. We find results consistent with these expectations. By contrast, we find a weaker negative relation between repurchases and conservatism when CEO tenure is higher, which confirms that more entrenched CEOs have less incentives to solve the overinvestment problem.
Orientation: This study investigated the trend and composition of total payout distributed by companies listed on the Johannesburg Stock Exchange (JSE) over a period of tax reform.Research purpose: ...The aim was to investigate whether the payout methods post-2012, after the introduction of dividends tax, differed from pre-2012.Motivation for the study: Tax-related dividend literature predominantly explores the implications of differential taxes on dividends and of capital gains on dividends with a limited focus on total payout. The setting to investigate the total payout of JSE-listed companies is also unique as a result of South African tax reform.Research design, approach and method: Descriptive statistics and a mixed-model analysis of variance were employed to describe the payout methods (dividends, capital distributions, additional shares and share repurchases) in rand value and frequency of election. The population comprised of 116 JSE-listed companies for the financial reporting periods 2006–2018.Main findings: Ordinary dividends increased post-2012 whilst other payout, except for additional shares, decreased post-2012. An increase in scrip dividends (additional shares with a cash alternative) post-2012 confers flexibility to shareholders to manage their own financial needs, including tax considerations.Practical/managerial implications: The policy implication is that the increasing use of ordinary dividends as a payout method could inform future government initiatives to generate revenue or provide tax incentives for saving.Contribution/value-add: Submitted as the first article to investigate total payout of JSE-listed companies over a period of tax reform to provide evidence that payout policies adjusted based on the differential tax on dividends and capital gains.
According to foreign research into developed markets, share repurchasing influences the speed of adjustment of companies’ capital structure to the target level. It is worth noting that the number of ...such research studies for emerging markets is rather small.
On the basis of an empirical study of a selection of 275 companies from BRICS countries involved in share repurchase for the period of 2005 to 2015 we prove here that share repurchase is an efficient method of correcting an existing capital structure, aligning it to approximate a target level in all BRICS countries. It should be noted that in accordance with our results, companies from Brazil and Russia show the highest speed of adjustment (within 63–80%). This indicates that these companies are able to achieve the target structure within a very short period. Companies from the other countries (India, China, and South Africa) also show a rather high rate of the speed of adjustment (in the range of 44 to 49%).
It is worth noting that apart from the share repurchase itself, characteristic features of the companies (as well as special characteristics of local economic factors where they are relevant) influence the speed of adjustment to the target capital structure. We also found out that the most significant factors which have positive effects on the speed of adjustment are the company size, its growth prospects, share of repurchased shares, economic growth rate, inflation rate in the country which adversely affect to a great extent the speed of adjustment to the target capital structure. For Russian companies the most significant determinants are the company size, share of repurchased shares and inflation rate.
An assessment of the speed of adjustment to the target capital structure of companies repurchasing shares showed that for Russian companies (for a balance sheet leverage) and for South African companies (for a market financial leverage) the speed of adjustment is not significant, however in general the countries selection and each sub-selection shows that BRICS countries’ companies are prone to adjust to the target capital structure quicker when the financial leverage is lower than the target value, while companies with an excess debt load optimize much slower.
On the basis of the research results we offer an algorithm pertaining to capital structure management for the companies acting in emerging markets using share repurchase in an open market.
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