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Factors influencing on-market share repurchase decisions in Australia

Subba Reddy Yarram (UNE Business School, University of New England, Armidale, Australia)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 29 July 2014

2014

Abstract

Purpose

The purpose of this study is to examine factors influencing decisions to repurchase shares on-market in Australia. The present study also examines the role of board size, board independence and chief executive officer duality on the decision to repurchase shares on-market by Australian firms.

Design/methodology/approach

This study blends the traditional motivations of share repurchases with the influences of governance. The sample consists of all non-financial firms included in the Australian All Ordinaries Index (AOI) for the period 2004-2010. The repurchase sample consists of 104 repurchases undertaken by 62 firms. A probit panel model is used to analyse the decision to repurchase shares on the market. To account for unobserved heterogeneity, random effects panel models are also used.

Findings

Analyses of a sample of non-financial firms included in the AOI for the period 2004-2010 show that size is significantly positively correlated with the decision to repurchase shares, thus supporting the agency cost. Findings also support the undervaluation and signalling hypotheses. Similarly, there is evidence in support of the view that firms repurchase shares to reach their target optimal capital structure. The present study also finds a significant positive association between board independence and the decision to repurchase shares in Australia.

Research limitations/implications

On-market share repurchases help firms to signal their future growth opportunities and resolve agency conflicts. Signals from repurchases also help markets discover the true fundamental values of firms. Governance plays an important role in improving the effectiveness of on-market share repurchases, as independent directors provide both monitoring and discipline which helps to ensure that firms have valid motivations in undertaking share repurchases.

Practical implications

These findings have implications for capital restructuring and governance policies. Principle-based governance frameworks that prevail in countries like Australia work as well as rule-based governance.

Originality/value

This study highlights the complementary roles that financial policies and corporate boards play in corporate governance. Independent boards ensure that firms pursue appropriate financial policies that help resolve agency conflicts and information asymmetry problems.

Keywords

Acknowledgements

The author would like to thank Bernard Bollen, Marilyn Hargreaves and Colin Hargreaves for helpful comments on the draft paper. He would also like to acknowledge the helpful suggestions made by the anonymous referee and the Associate Editor, Hamid Uddin. Usual disclaimers apply.

Citation

Reddy Yarram, S. (2014), "Factors influencing on-market share repurchase decisions in Australia", Studies in Economics and Finance, Vol. 31 No. 3, pp. 255-271. https://doi.org/10.1108/SEF-02-2013-0021

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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