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Article
Publication date: 3 July 2020

Tianzhuo Liu, WangBo Liu and Feng Yang

Based on the traditional buyback model, this paper aims to propose a new buyback method – the variable buyback contract – to solve the serious inventory backlog in the…

Abstract

Purpose

Based on the traditional buyback model, this paper aims to propose a new buyback method – the variable buyback contract – to solve the serious inventory backlog in the current economic situation.

Design/methodology/approach

In this paper, the authors further study the buyback problem in a two-level supply chain with uncertain demand. Such a problem can be found in many research papers, which also use the Stackelberg game model. They put forward many factors that affect the buyback price, including risk preference, random arrival of consumers, etc. Different from the existing research, the authors propose another factor that may affect supply chain buyback – the retailer's remaining inventory to study the buyback contract.

Findings

First, the authors found that under the variable buyback contract, there is an optimal retail price, wholesale price and an optimal range of parameter settings for the buyback price. Second, the proposed Pareto-optimal solution for system improvement can achieve supply chain coordination. Third, under some conditions, the variable buyback contract is better than the wholesale price contract and fixed-price buyback contract.

Originality/value

First, this is the first paper to discuss to measure the buyback price with the retailer's remaining inventory. Second, the proposed buyback contract can help decision-makers to choose the optimal improvement strategies. Third, this contract has a certain practical significance, which can effectively alleviate the current inventory backlog problem.

Details

Journal of Modelling in Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-5664

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Article
Publication date: 22 April 2008

David N. Hurtt, Jerry G. Kreuze and Sheldon A. Langsam

One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and…

Abstract

One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and financial reporting of stock options. In December 2004, the FASB issued Statement 123R, Share‐Based Payment, in the hope that the long process of revising the accounting and financial reporting for stock options will be put to rest. FASB Statement 123R requires the fair‐value‐based method of accounting for share‐based payments. In order to offset the dilutive effects of generous stock option compensation packages for employees, companies are seemingly participating in stock repurchase plans. In the past, stock buyback programs were viewed as a means of distributing excess cash flow to investors; however, it appears now that many companies are financing stock repurchases through the issuance of debt, which can significantly impact the financial flexibility of a company. So, why do companies engage in this behavior? One possible reason for stock buybacks is to reduce the dilutive effect of stock option plans. Companies have, however, disputed that there is a direct relationship between exercised stock options and stock buyback transactions. Nevertheless, several articles and studies have found that there is a relationship and the FASB seems to believe that there is an association between stock buybacks and stock options, as Statement 123R requires that companies disclose the relationship between stock buybacks and stock payment programs. Using a sample of technology firms, we find evidence of an association between exercised stock options and repurchase of stock.

Details

American Journal of Business, vol. 23 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 2 October 2007

Jaemin Kim

The paper seeks to examine changes in daily return volatility associated with open market share repurchases.

Abstract

Purpose

The paper seeks to examine changes in daily return volatility associated with open market share repurchases.

Design/methodology/approach

Univariate analyses, control sample analyses, and multiple regression analyses are employed to explore relations between daily return volatility and a number of variables.

Findings

This study finds evidence that an open market share repurchase firm, by actively buying back its shares when the share price falls, reduces daily return volatility. The results suggest that it is the subsequent actual buyback trading activity, not the announcement, that is significantly negatively associated with changes in daily return volatility. CAPM beta, a measure of systematic risk, decreases only when the firm is in the market actively repurchasing its shares.

Originality/value

To the best of the author's knowledge, this study is probably the first to connect changes in daily return volatility to actual buyback trading activities of share repurchase announcing firms. Changes in daily return volatility, or total risk, not only affect systematic risk, but also are important to underlying option holders, arbitrageurs, and investors who hold undiversified portfolios.

Details

International Journal of Managerial Finance, vol. 3 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 22 February 2008

Jaemin Kim and Nikhil Varaiya

Due to insufficient disclosure on open market share repurchases in the USA, at any given point in time, outside shareholders have no knowledge of whether their firm is…

Abstract

Purpose

Due to insufficient disclosure on open market share repurchases in the USA, at any given point in time, outside shareholders have no knowledge of whether their firm is executing open market share repurchase trades. It is hypothesized that such information disparity between outside shareholders and insiders of a repurchasing firm creates asymmetric opportunities for insiders to time their sell trades in a period when the firm is engaged in buyback trading of its own shares. Insiders have an incentive to sell when the firm is in the market supporting the price by repurchasing its shares. The purpose of this study is to examine this hypothesis (insider timing hypothesis) by investigating insiders' trading activities during the periods of corporate share buyback trading.

Design/methodology/approach

Multiple regression analyses are used to explore relations among trades by insiders, corporate share buyback trades, and a number of other control variables.

Findings

This study finds evidence that insiders do increase the net number of shares sold in a fiscal quarter when the firm is in the market engaged in share buyback trading.

Originality/value

This study suggests the possibility of insiders' opportunistic trading behavior during the periods of corporate open market share buyback trading.

Details

Review of Accounting and Finance, vol. 7 no. 1
Type: Research Article
ISSN: 1475-7702

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Book part
Publication date: 12 April 2012

Chanaka Edirisinghe, Bogdan Bichescu and Xinjie Shi

In a decentralized supply chain with one supplier and one retailer, a properly designed contract can lead to supply chain coordination. In this chapter, we model the…

Abstract

In a decentralized supply chain with one supplier and one retailer, a properly designed contract can lead to supply chain coordination. In this chapter, we model the selection of an appropriate coordinating contract from a menu of contracts including wholesale price, buyback, and markdown money, while allowing both the supplier and the retailer to assume the roles of Stackelberg leader and/or supply chain captain. This work extends previous literature that assumes that the supplier is both the Stackelberg leader and the supply chain captain. In our models, either agent can make stocking and pricing decisions. Our findings suggest that the feasibility of a coordinating contract depends on the addition of Pareto-improving, profit-sharing conditions that motivate agents to take part in the contract. Further, the selection of an optimal contract is based not only on which agent holds the overstock liquidation advantage, but also on the decision structure of the supply chain. For instance, when the supplier is the Stackelberg leader and the retailer is the supply chain captain, as well as holds the inventory liquidation advantage, and controls the stocking level, then a wholesale price contract can coordinate the supply chain under the proposed Pareto-improving profit sharing, termed Pareto-improving coordination. Additional results and managerial implications are presented in the chapter.

Details

Applications of Management Science
Type: Book
ISBN: 978-1-78052-100-8

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Article
Publication date: 24 May 2013

António Martins

The purpose of this paper is to analyze how share buybacks can be, in Portuguese small privately held firms, a source of tax‐based conflicts between shareholders and tax…

Abstract

Purpose

The purpose of this paper is to analyze how share buybacks can be, in Portuguese small privately held firms, a source of tax‐based conflicts between shareholders and tax administrations. Two issues are of particular relevance: the favored tax treatment of capital gains relative to dividends, and the use of valuation formulae to compute prices used in such transactions. The paper intends to present some advice to firms and consultants regarding equity valuation in privately held firms, to avoid tax based litigation. An extended analysis of the issue and its relevance to other jurisdictions is also presented.

Design/methodology/approach

The paper is based on a conceptual discussion of the usual approach taken by the Portuguese tax authorities to challenge share buybacks in small, privately held, firms. The arm's length principle in transfer pricing rules is the cornerstone of the topic analysed. The paper compares the merits of alternative pricing basis, and shows the economic and legal problems that each alternative presents.

Findings

The paper finds that the lack of tax neutrality between dividends and capital gains in Portugal can induce tax motivated transactions in small firms. The tax administration try to challenge these transactions on transfer pricing grounds. The alternative valuation strategy used by tax authorities is flawed, and puts the taxpayers in a good litigation position. However, a sensible valuation put forward by the firm can avoid such legal battles, which consume time and other resources of small owners.

Practical implications

The owners of privately held firms and the tax authorities should use valuation methods in very sensible terms. Cash flow valuation rests on several assumptions. These assumptions should not be used to produce prices that are easily questioned and increase litigation between firms and taxpayers.

Originality/value

The paper can be a source of practical advice for small business owners and advisors, as far as share transactions and share valuation are concerned. It is useful not only for the Portuguese managers and tax authorities, but also for any country where taxation of dividends and capital gains induces tax motivated buybacks.

Details

Journal of Applied Accounting Research, vol. 14 no. 1
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 1 August 2020

Anthony Chen and Hung-Yuan (Richard) Lu

In this study, the authors extend upon Brockman et al. (2008), who provide evidence that managers opportunistically accelerate bad news prior to share repurchases, but…

Abstract

Purpose

In this study, the authors extend upon Brockman et al. (2008), who provide evidence that managers opportunistically accelerate bad news prior to share repurchases, but provide limited evidence that managers withhold good news until after repurchases. The authors examine management forecasts surrounding share repurchases in periods when companies must disclose detailed repurchase information. The authors argue these disclosures increase managers' legal and reputation risks of accelerating bad news, but have a lesser effect on delaying good news.

Design/methodology/approach

First, the authors examine whether managers alter the information released to the market before buying back shares by comparing managerial forecasts made within 30 days before the beginning of a repurchasing period with those made outside of this window. Second, the authors examine whether managers are more likely to provide good news forecasts, in terms of both magnitude and frequency, after buying back shares. Lastly, the authors examine the impact of CEO stock ownership on managerial forecasting behavior surrounding share buybacks.

Findings

Consistent with the authors’ hypotheses and contrary to Brockman et al. (2008), the authors find limited evidence that the likelihood or magnitude of bad news forecasts is greater in the period before share buybacks. Instead, the authors document that the frequency and magnitude of good news forecasts increase in periods following share buybacks and that these associations are positively moderated by managerial equity incentives. The authors also find that the withholding of good news is associated with lower average repurchase prices and greater repurchase volume. The authors further show that, when litigation risk is greater, managers are less likely to accelerate bad news prior to repurchases and more likely to withhold good news until after. Overall, the study results are consistent with managers balancing the benefits of opportunistic repurchase behavior with the costs.

Originality/value

This study contributes to the management forecast and share repurchase literatures by providing evidence consistent with managers opportunistically releasing earnings forecasts in the period after buying back shares. Most importantly, the authors show that after the rule revision, managers refrain from actively disclosing bad news that carry higher legal costs. Instead, they opt for the omission of good news to repurchase stocks at lower prices. The study results reconcile the conflicting evidence of Brockman et al. (2008) and Ge and Lennox (2011).

Details

Asian Review of Accounting, vol. 28 no. 4
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 29 July 2014

Subba Reddy Yarram

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…

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.

Details

Studies in Economics and Finance, vol. 31 no. 3
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 26 September 2011

Karyn L. Neuhauser, Wallace N. Davidson and John L. Glascock

This study seeks to analyze the differences between merger cancellations and three types of takeover failures: failures that are associated with targeted share repurchases…

Abstract

Purpose

This study seeks to analyze the differences between merger cancellations and three types of takeover failures: failures that are associated with targeted share repurchases (greenmail), failures in which the sole bidder simply withdraws the offer, and failures that are accompanied by a general share repurchase (buyback).

Design/methodology/approach

The paper uses event study methods and regression analysis.

Findings

The paper observes negative target stock price reactions around all types of takeover failures and merger cancellations. However, the cumulative effect of takeover attempts is positive, suggesting that even unsuccessful tender offers generate permanent gains to target firm shareholders, while the cumulative effect of canceled mergers is negative. Furthermore, the market reaction to greenmail‐induced takeover failure announcements is no worse than that of voluntary withdrawals, suggesting that greenmail may play an efficient role in mitigating the effects of takeover bid withdrawals. Finally, while bidder wealth is destroyed in takeover failures, the effect of merger cancellations on bidders is considerably more devastating.

Originality/value

The paper provides evidence of negative stock price reactions to all forms of merger failure. The paper also shows that the cumulative effect of all types of takeover failures is still positive: suggesting that being put into play is still beneficial overall but that canceled mergers destroy value for both targets and bidders. The paper shows that the market reaction to greenmail‐induced failure announcements is no worse than other forms of failure. Finally, while there is an immediate downturn in target prices around a failure, the negative outcome is more severe for the bidders. Thus, the market sees that there was something useful about the anticipated change in corporate control, which was lost when it failed to be completed.

Details

International Journal of Managerial Finance, vol. 7 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 1 January 2004

John Pointon and Derek Spratley

An empirical survey, of 136 respondents from UK quoted companies, was conducted with regard to the likely effects of UK corporation tax reform on share buy‐backs, capital…

Abstract

An empirical survey, of 136 respondents from UK quoted companies, was conducted with regard to the likely effects of UK corporation tax reform on share buy‐backs, capital investment and financing choices. Overall, 45 per cent expected ACT abolition to lead to an increase in share buy‐backs. Logistic regression analysis links this view to corporate liquidity. The abolition of advance corporation tax is, however, unlikely to have a significant impact upon UK and overseas capital investment, bond issues, bond redemptions, share issues, finance leasing and projected dividend levels. Capital investment and financing choices are likely to be invariant to the combined effects of a reduced corporate tax rate and a quarterly collection period.

Details

Journal of Applied Accounting Research, vol. 7 no. 1
Type: Research Article
ISSN: 0967-5426

Keywords

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