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1 – 10 of 390Share repurchase programs are the most important form of payout, yet the implications of incomplete share repurchase programs have not been examined in previous literature. This…
Abstract
Purpose
Share repurchase programs are the most important form of payout, yet the implications of incomplete share repurchase programs have not been examined in previous literature. This study tests whether incomplete share repurchase programs are seen as a positive or as a negative signal by investors.
Design/methodology/approach
The perception of incomplete share repurchase programs by algorithmic traders, institutional investors and analysts is analyzed with structural equation models, seemingly unrelated regressions, propensity score matching and buy-and-hold abnormal returns on data from share repurchase programs in the United States. In contrast to previous literature, algorithmic trading is appropriately estimated as a latent variable, leading to more reliable results. Furthermore, decisions about share repurchases and dividends are appropriately modeled simultaneously and iteratively, based on findings from previous literature.
Findings
The results show that sophisticated investors such as algorithmic traders, institutional investors and financial analysts avoid incomplete share repurchase programs over a long-term investment horizon. Thus, incomplete share repurchase programs are interpreted as negative signals. Additional analyses reveal that share repurchase programs are not completed due to insufficient cash flow, as a result of financial difficulties. Overall, this implies that financial managers should be careful to announce share repurchase programs they know cannot be completed, similar to dividends that cannot be maintained over a long-term horizon.
Originality/value
This study is the first to consider incomplete share repurchase programs. The findings are of interest to scholars and practitioners, as this study goes beyond narrow repurchase program announcement windows, and instead focuses on the longer-term investment horizon over the life of the share repurchase program, which is often ignored in prior research.
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Raghavan Iyengar and Barry Shuster
Outstanding unexercised stock options can motivate managers to engage in actions that increase the value of their company’s stock, including buying back their firm’s stock. The…
Abstract
Purpose
Outstanding unexercised stock options can motivate managers to engage in actions that increase the value of their company’s stock, including buying back their firm’s stock. The objective of granting stock options to managers is to align their interests with stockholders by tying a portion of their compensation to the company’s stock performance. However, unexercised stock options may have unintended consequences by providing managers with a vested interest in artificially boosting stock prices via stock buybacks. The primary objective of this research is to study the main factors that influence firms' buyback decisions amongst hospitality firms at a time when these firms were clamoring for taxpayer bailouts. Results from logistic regression seem to suggest that outstanding executive stock options are a major contributory factor in a firm’s buyback decision. Estimates also indicate that larger, more profitable firms will likely engage in stock buybacks. These findings survive a battery of tests.
Design/methodology/approach
The authors use logistic regression to predict the probability of a firm’s buyback decision based on a given set of exogenous explanatory variables.
Findings
The paper supports the hypothesis that buyback decisions are guided by the motive to prop support stock prices in the presence of outstanding restricted stock options/warrants granted to firms' executives.
Research limitations/implications
The paper focuses on the buyback decision of U.S. hospitality firms. The results, therefore, might not be generalizable to firms in other industries or countries.
Practical implications
U.S. share repurchase corporate policy and government regulation needs to be revisited given the economic imperative for firms to invest in activities to restore employment and put them in a position for economic recovery.
Social implications
Public criticism of the size, structure and form (i.e. loan vs grant) of COVID-19 bailouts warrants an examination of whether the factors that drive hospitality and tourism firms to repurchase shares support economic recovery.
Originality/value
Consistent with agency theory, the authors find a significant positive association between outstanding restricted stocks and a firm’s decision to support the stock prices by buying back shares.
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Muhammad Nurul Houqe, Michael Michael, Muhammad Jahangir Ali and Dewan Rahman
The purpose of this paper is to examine the association between company reputation and dividend policy.
Abstract
Purpose
The purpose of this paper is to examine the association between company reputation and dividend policy.
Design/methodology/approach
In this study, sample of 98,809 firm-year observations from 22 countries covering 2005–2016 were used.
Findings
Firm reputation concerns are associated with higher propensities to pay dividends and payout ratios. Further, this positive effect is more pronounced for firms with high free cash flows, high information asymmetry and low institutional monitoring. The results are robust to an instrumental variable approach, propensity score matching and the Heckman two-stage correction approach while addressing endogeneity concerns.
Practical implications
These findings have significant implications for various stakeholders, such as existing and potential investors, managers, policymakers and regulators, by providing insights into the relationship between corporate reputation and firm dividend payout decisions. Corporate reputation is highlighted as crucial for accessing finance, emphasizing the role of national regulators and policymakers in facilitating firms' efforts to improve their reputation. The study highlights the dynamics of corporate reputation and dividend payout, calling for proactive engagement from regulators and policymakers. Crafting policies conducive to reputation-building can enhance firms' financial prospects, indicating the need for strategic interventions at managerial, regulatory and policy levels. Understanding the influence of economic context is crucial for firms to tailor reputation management strategies and optimize funding opportunities in different economic environments.
Originality/value
Overall, results suggest that reputation serves as a disciplining mechanism, where firms will pay dividends to maintain their reputations.
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The study aims to examine the dividend omissions and dividend cuts behaviour of manufacturing and non-financial services firms to identify the determinants of dividend omissions…
Abstract
Purpose
The study aims to examine the dividend omissions and dividend cuts behaviour of manufacturing and non-financial services firms to identify the determinants of dividend omissions and dividend cuts.
Design/methodology/approach
The study analyses the financial data of 3,546 firms from 2011 to 2020 (35,460 firm-year observations) using a dynamic random-effect probit panel regression model.
Findings
The results suggest that profitability, growth opportunity, leverage, liquidity, risk, extraordinary income, shareholding pattern and buyback are major determinants of dividend omissions. Similarly, dividend cut in the previous year, profitability, operating cash flow, risk and extraordinary income are major factors leading to dividend cuts.
Research limitations/implications
Firms which omit the dividend are less likely to start paying dividend in subsequent years, whereas firms which cut the dividend may increase dividend in later years. Also, profitability decreases for a significant number of firms post dividend omission and cut. This indicates that dividend omission is a more prominent signal than a dividend cut for the financial health of a firm.
Practical implications
The determinants identified in the study enable analysts and portfolio managers to decide the propensity of dividend omission and cut even before actual announcements and can alleviate the significant loss in the portfolio. Also, managers and the board of directors would be able to monitor the firm’s financial performance to avoid the situation leading to dividend omissions and cuts.
Social implications
The study strongly recommends that firms should voluntarily pay dividends to shareholders to encourage the healthy participation of retail shareholders in the equity market and create a long-term win–win situation for all stakeholders in society. If a large number of firms continue not to pay the dividend, the study appeals to the regulators to intervene to protect shareholders' interests for the greater good of society.
Originality/value
To the best of author’s knowledge, this is the first study to empirically identify the determinants of dividend omission and cut in the unique setting like India where dividend taxation had undergone a significant change.
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Surprisingly little is known of the various methods of security analysis used by financial analysts with industry-specific knowledge. Financial analysts’ industry knowledge is a…
Abstract
Purpose
Surprisingly little is known of the various methods of security analysis used by financial analysts with industry-specific knowledge. Financial analysts’ industry knowledge is a favored and appreciated attribute by fund managers and institutional investors. Understanding analysts’ use of industry-specific valuation models, which are the main value drivers within different industries, will enhance our understanding of important aspects of value creation in these industries. This paper contributes to the broader understanding of how financial analysts in various industries approach valuation, offering insights that can be beneficial to a wide range of stakeholders in the financial market.
Design/methodology/approach
This paper systematically reviews existing research to consolidate the current understanding of analysts’ use of valuation models and factors. It aims to demystify what can often be seen as a “black box”, shedding light on the valuation tools employed by financial analysts across diverse industries.
Findings
The use of industry-specific valuation models and factors by analysts is a subject of considerable interest to both academics and investors. The predominant model in several industries is P/E, with some exceptions. Notably, EV/EBITDA is favored in the telecom, energy and materials sectors, while the capital goods industry primarily relies on P/CF. In the REITs sector, P/AFFO is the most commonly employed model. In specific sectors like pharmaceuticals, energy and telecom, DCF is utilized. However, theoretical models like RIM and AEG find limited use among analysts.
Originality/value
This is the first paper systematically reviewing the research on analyst’s use of industry-specific stock valuation methods. It serves as a foundation for future research in this field and is likely to be of interest to academics, analysts, fund managers and investors.
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Sajjad Zaheer and Sweder van Wijnbergen
This study aims to analyze three major defaults on Sukuk since 2007. These case studies make clear that, in most cases, the problems can be traced back to clauses and structures…
Abstract
Purpose
This study aims to analyze three major defaults on Sukuk since 2007. These case studies make clear that, in most cases, the problems can be traced back to clauses and structures that made the Sukuk more like conventional bonds. The case studies highlighted the importance of the legal institutions of the country where ownership rights are likely to be contested. Strict adherence to Shariah (Islamic Jurisprudence) principles would have considerably simplified restructuring because Shariah compliance implies a clear allocation of property rights: in Sukuk, investors will receive full title to the underlying Sukuk assets in distress situations.
Design/methodology/approach
The study follows a qualitative research method base on detailed case studies of the Sukuk defaults occurred in the aftermath of financial crises 2007. The focus in this paper is on the resolution process following default, not on the reasons why the default was triggered to begin with. The authors analyze the Sukuk defaults from an Islamic finance perspective. Specifically, after providing basic information on each Sukuk (issuer, arranger, SPV, term period, rate of return, etc.), the authors present an exposition of the underlying contracts of each Sukuk, their structure, reasons for defaults and restructuring process thereafter. Finally, the authors provide a discussion on the critical issues related to Sukuk structures, namely, ownership of underlying Sukuk assets, rights of the investors including recourse, if any, to core assets in case of distress, risk factors including legal and Shariah risks regarding Sukuk structures, purchase undertakings and credit enhancements.
Findings
The case studies highlighted the importance of the legal institutions of the country where ownership rights are likely to be contested. Interestingly enough, strict adherence to Shariah (Islamic Jurisprudence) principles would have considerably simplified restructuring because Shariah compliance implies a clear allocation of property rights: in Sukuk, investors will receive full title to the underlying Sukuk assets in distress situations. So, the answer to the question the authors asked, is Islamic Finance failing to deliver on its promises, is a qualified no.
Originality/value
The paper provides in depth analysis of the Sukuk defaults and provide the main reasons for that along with recommendations that compliance to Shariah principles of ownership and risk sharing would reduce incidence of defaults and facilitates restructuring.
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Ali A. Awad, Radhi Al-Hamadeen and Malek Alsharairi
This paper aims to examine and compare the dividend ratios’ statistical and economic ability to predict the equity premium in the UK and US markets and two US sub-indices (S&P 500…
Abstract
Purpose
This paper aims to examine and compare the dividend ratios’ statistical and economic ability to predict the equity premium in the UK and US markets and two US sub-indices (S&P 500 Growth and S&P 500 Value).
Design/methodology/approach
In this paper, the authors use the linear regression models to examine the dividend ratios’ statistical ability to predict the equity premium. The in-sample and out-of-sample approaches, including Diebold and Mariano (1995) statistics, and Goyal and Welch’s (2003) graphical approach, are used. Also, the mean-variance analysis is used to test the economic significance.
Findings
The paper findings indicate that the dividend ratios have in-sample and out-of-sample predictive abilities in both UK and US markets and both US sub-indices. However, the results show that the dividend ratios have a less impressive predictive ability in the US market compared to the UK market and less in the US value index than the US growth index. This could indicate that there is no relation between the number of companies that distribute dividends in each index and the informativeness of dividends ratios. Furthermore, the tests show the dividend ratios’ predictive ability departure during particular periods and in some indices.
Research limitations/implications
Results and implications of this research are exclusively applied to the US and UK markets. These results can also be applied with caution to other markets, taking into consideration the distinctive characteristics of these markets.
Practical implications
Results revealed in this paper imply that the investors in any of the indices may experience economic gain by adopting a dynamic trading strategy using the information content of the dividend ratios prediction models instead of the benchmark model, which is the prevailing simple moving average model.
Originality/value
This paper adds value through testing the prediction models’ economic significance in two well-developed markets, in addition to exploring the relationship between the number of companies distributing cash dividends and the dividends ratio prediction ability. Unlike most of the previous studies in which dividend ratios’ prediction ability is attributed to the number of companies that distribute dividends in the market, this paper denied this interpretation by studying two S&P 500 sub-indices. To the best of the authors’ knowledge, this is the first study to test the prediction models’ ability for these sub-indices.
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Grant Richardson, Grantley Taylor and Mostafa Hasan
This study examines the importance of income income-shifting arrangements of US multinational corporations (MNCs) on future stock price crash risk.
Abstract
Purpose
This study examines the importance of income income-shifting arrangements of US multinational corporations (MNCs) on future stock price crash risk.
Design/methodology/approach
This study employs a sample of 7,641 corporation-year observations over the 2005–2017 period and uses ordinary least squares regression analysis.
Findings
The authors find that the income-shifting arrangements of MNCs are positively and significantly associated with stock price crash risk after controlling for corporate tax avoidance and other known determinants of stock price crash risk in the regression model. This result is robust to alternative measures of stock price crash risk and income-shifting, and several endogeneity tests. The authors also observe that income-shifting arrangements increase stock price crash risk both directly and indirectly through the information opacity channel. Finally, in cross-sectional analyses, the authors find that the positive association between income-shifting and stock price crash risk is more pronounced for MNCs that use tax haven subsidiaries and have weak corporate governance mechanisms.
Originality/value
The authors provide new empirical evidence that MNCs will likely face significant capital market consequences regarding their income-shifting arrangements.
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Nomanyano Primrose Mnyaka-Rulwa and Joseph Olorunfemi Akande
Agency theory motivated this study, posing that leverage mitigates the agency problem. The aim was to examine whether leverage influences the relationship between…
Abstract
Purpose
Agency theory motivated this study, posing that leverage mitigates the agency problem. The aim was to examine whether leverage influences the relationship between executive-employee pay gaps (EEPGs) and firm performance. The study was conducted in the mining and retail sectors between 2012 and 2021.
Design/methodology/approach
Two EEPGs were featured based on their executive fixed pay and variable incentives accumulation. Proxies of firm performance were headline earnings per share; return on assets; earnings before interest, tax, depreciation and amortisation; and return on stock price. Data were collected from 76 JSE-listed firms in the retail and mining sectors and analysed using the two-step generalised method of moments.
Findings
The results revealed the hybrid implication of the pay gap for firm performance in the retail and mining sectors of South Africa, depending on the performance measures emphasised. More importantly, the study shows that with the moderating effects of leverage, firms can improve their performance while shrinking the pay gap.
Practical implications
The results have implications for policy addressing income inequality, debt management, executive compensation and regulatory reforms in South Africa concerning productivity and remuneration decisions.
Originality/value
The article provides specific literature for retail and mining industries on pay gaps, shows that it is possible to reduce the pay gap without compromising performance and suggests a new measure of performance that is more attuned to pay gap effect measurement.
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Yu Xia and Shuxin Guo
We are the first to investigate the relationship between seasoned equity offerings (SEOs) and anchoring on historical high prices in China.
Abstract
Purpose
We are the first to investigate the relationship between seasoned equity offerings (SEOs) and anchoring on historical high prices in China.
Design/methodology/approach
We use the ratio of the recent closing price to its historical high in the previous 12–60 months (anchoring-high-price ratio) to study its impact on the market timing of SEOs.
Findings
Empirical results show that the anchoring-high-price ratio significantly and positively affects the probability of additional stock issuances. Contrary to the USA market, the Chinese stock market reacts negatively to the SEOs at historical highs. Moreover, the anchoring-high-price ratio exacerbates the negative effect of announcements and leads to long-term underperformance. Finally, we investigate the impact of the anchoring-high-price ratio on a company’s capital structure, showing that the additional issuance anchoring on historical highs reduces the company’s leverage ratio in the long run. Overall, our findings support the anchoring theory and can help understand better the anchoring behavior of managers and the company’s decision on additional stock issuances.
Originality/value
We are the first to use the anchoring-high-price ratio to study the timing of SEOs. We find that the anchoring-high-price ratio positively affects the probability of SEOs. Unlike the USA, the Chinese stock market reacts negatively to SEOs at high prices. SEOs anchoring on historical highs reduce a firm’s leverage ratio in the long run. Finally, our results support the anchoring theory.
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