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Article
Publication date: 31 December 2015

Nan Liu and Jamshid Mehran

The purpose of this paper is to investigate whether firms repurchase shares to meet or just beat their dividend target as managers perceive share repurchases are more flexible…

1693

Abstract

Purpose

The purpose of this paper is to investigate whether firms repurchase shares to meet or just beat their dividend target as managers perceive share repurchases are more flexible than dividends and managers have a strong desire to maintain dividend levels and dividend payout ratio of the firms.

Design/methodology/approach

The authors first run a Tobit regression to examine whether firms meeting or just beating the quarterly dividend per share threshold exhibit unusually high repurchases, controlling for the factors shown to affect repurchases. The authors then calculate abnormal repurchases and compare firms that would otherwise miss the benchmark with other firms.

Findings

The authors find that firms meeting or just beating the quarterly dividend per share threshold repurchase more shares than other firms, after controlling for the substitution effect, investment opportunities and financial performance. In addition, firms otherwise missing the quarterly dividend per share threshold repurchase abnormally more shares to meet the threshold.

Originality/value

The study contributes to the payout policy literature in the following ways. First, it extends the understanding of the association between dividend payout and repurchase. Second, it contributes to the threshold literature by showing that firms manipulate repurchases in addition to earnings to meet their quarterly dividend per share threshold. Third, it provides support to the survey evidence that firms have a strong desire to maintain their dividend policies.

Details

Managerial Finance, vol. 42 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Book part
Publication date: 15 August 2007

Hardjo Koerniadi, Ming-Hua Liu and Alireza Tourani-Rad

In this paper, we investigate the New Zealand stock market reactions to both on-market and off-market share repurchase programmes for the period 1995–2004. Share repurchases have…

Abstract

In this paper, we investigate the New Zealand stock market reactions to both on-market and off-market share repurchase programmes for the period 1995–2004. Share repurchases have become more frequent in New Zealand in recent years, though the size and the number of repurchases are still small by international standards. The main reason appears to be the presence of the dividend imputation system which diminishes the tax consequences of cash dividends compared to capital gains. On the whole, we observe that the market reacts positively and significantly to the share repurchase announcements. The magnitude of average abnormal returns for the on- and the off-market repurchases on the announcement day are 3.25 and 3.12% respectively. We further observe the reasons companies undertake stock repurchase are consistent with the investment and free cash flows agency hypotheses.

Details

Issues in Corporate Governance and Finance
Type: Book
ISBN: 978-1-84950-461-4

Article
Publication date: 20 June 2022

Ni-Yun Chen

This study examines whether insider share ownership and personal share collateral affect corporate payout decisions.

Abstract

Purpose

This study examines whether insider share ownership and personal share collateral affect corporate payout decisions.

Design/methodology/approach

This study estimates logit, Tobit and ordinary least squares regression models to explore how insider ownership is related to share repurchase probability, completion rates and the long-term performance following the repurchase announcements and how insider share collateral affects the above associations.

Findings

The results show that insider share ownership is negatively associated with the probability of announcing share repurchases and repurchase completion rates and is positively associated with the firm's post-announcement performance. This study further explores the incentive of insiders with high share collateral announcing share repurchases under a threat of margin call. For firms with a high percentage of insider share collateral, the results show that insider share ownership is associated with higher repurchase probability but is associated with lower repurchase completion rates and poorer post-announcement performance.

Originality/value

This study clarifies the interrelationships between insider ownership, insider share collateral and decisions in share repurchases and subsequent performance. This study provides evidence for both the convergence of interest and the entrenchment theories.

Details

Managerial Finance, vol. 48 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

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, board…

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.

Details

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

Keywords

Article
Publication date: 2 February 2015

Manon Deslandes, Suzanne Landry and Anne Fortin

– The purpose of this paper is to examine whether the significant dividend tax rate reduction for individual investors in Canada in 2006 affected firms’ payout policies.

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Abstract

Purpose

The purpose of this paper is to examine whether the significant dividend tax rate reduction for individual investors in Canada in 2006 affected firms’ payout policies.

Design/methodology/approach

Using regression models, the authors examine the impact of the 2006 dividend tax cut on dividends and share repurchases in Canadian listed firms from 2003 to 2008. The authors also ran a multinomial logit regression to examine choices between payout policies.

Findings

Following the tax cut, firms increased their dividend payouts, with larger increases for firms in which shareholders benefited from the reduced tax rate. However, the 2006 tax cut appears to have had no negative effect on distributions through share repurchases. After the 2006 dividend tax cut, firms owned by shareholders subject to dividend taxes were more likely to use a combination of distribution mechanisms than share repurchases only, dividends only, or no payouts.

Practical implications

Shareholders’ tax preferences are an important factor for firms to consider when designing payout distribution policies. Following the 2006 dividend tax cut, firms increased their dividend payouts.

Social implications

The findings provide tax regulators with insight into how firms react to tax reform. They suggest that firms adapt their payout policy in the face of: a noteworthy dividend tax cut (6.2 per cent); a dividend tax cut that does not encourage tax arbitrage; and a dividend tax cut that does not economically favour dividend payment over share repurchases.

Originality/value

The paper considers the 2006 dividend tax rate cut in Canada, which presents a number of significant features that allow capturing the effect of a tax cut on payout policies.

Details

International Journal of Managerial Finance, vol. 11 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 27 July 2020

Gretha Steenkamp and Nicolene Wesson

Share repurchases are increasingly employed in South Africa. Disclosure on share repurchases in annual reports is poor, and a high percentage of share repurchases are not…

Abstract

Purpose

Share repurchases are increasingly employed in South Africa. Disclosure on share repurchases in annual reports is poor, and a high percentage of share repurchases are not announced in real time on the Johannesburg Stock Exchange (JSE). A comprehensive database of share repurchases by JSE-listed companies has been created up to 2009, but post-recession repurchase behaviour is not known. This study aims to examine South African share repurchase behaviour (activity, repurchase entity, repurchase type and transparency) in the post-recession period and compare this to the 2000–2009 period.

Design/methodology/approach

Comprehensive share repurchase data for all JSE-listed companies (excluding those in the basic materials and financial industries) were obtained by scrutinising annual reports and JSE announcements.

Findings

The repurchasing of shares reached a peak during the financial recession of 2008/2009, with share repurchases stabilising at a lower level post-recession. Repurchases executed by subsidiaries have decreased post-recession, probably owing to the introduction of dividends tax. However, 45% of the share repurchase value was not announced via the JSE (compared to 22% in 2000–2009).

Practical implications

Real-time JSE announcements of all share repurchases are required to improve transparency.

Originality/value

Owing to low announcement rates, a lack of transparency relating to share repurchases was observed in South Africa post-recession. Enhanced corporate governance requirements could improve transparency.

Details

Journal of Accounting in Emerging Economies, vol. 10 no. 3
Type: Research Article
ISSN: 2042-1168

Keywords

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 financial…

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

Keywords

Article
Publication date: 1 February 2001

John P Evans and Robert T Evans

Drawing from earlier work and market sentiment, two non‐mutually exclusive hypotheses were framed to test the proposition that share repurchase programs are a performance…

396

Abstract

Drawing from earlier work and market sentiment, two non‐mutually exclusive hypotheses were framed to test the proposition that share repurchase programs are a performance improving strategy. To achieve the above, a large sample of companies that repurchased shares is compared to a matched sample of companies not pursuing a share repurchase strategy. The comparative analysis covers numerous time intervals. In comparing the accounting performance of repurchasing companies to that of non‐repurchasing companies, Return on Assets (ROA), Return on Equity (ROE), Return on Sales (ROS), Book‐to‐Market (B/M), Earnings per Share (EPS), and Sustainable Growth Rate (SGR) are applied. The primary conclusion drawn from the performance of these indicators is a high degree of difference in the performance of repurchasing and non‐repurchasing firms. There is also evidence to suggest, at least in the aggregate repurchasing sample, that the performance of repurchasing companies fails to significantly improve in the post announcement period.

Details

Asian Review of Accounting, vol. 9 no. 2
Type: Research Article
ISSN: 1321-7348

Article
Publication date: 13 March 2019

John Rozycki and Inchul Suh

The purpose of this paper is to examine the short-term and long-term wealth effects of two share repurchase motivations.

Abstract

Purpose

The purpose of this paper is to examine the short-term and long-term wealth effects of two share repurchase motivations.

Design/methodology/approach

The authors use a multi-period numerical model and a Monte Carlo simulation. The Monte Carlo simulation introduces uncertainty into firms’ market values and eliminates some restrictions used in the numerical model.

Findings

In the long term, firms that refrain from repurchasing overvalued shares outperform otherwise identical firms that do not exhibit such restraint. In the short term, firms that repurchase overvalued shares can outperform firms that refrain from such repurchases. Total returns are a function of misvaluation, the firm’s repurchase decision, the rate of return on invested cash and how long the shares remain misvalued. Share price volatility can influence share repurchase decisions.

Research limitations/implications

The models are incapable of fully modeling the complexities of a dynamic economic environment.

Practical implications

Managers and investors need to be aware of the short-term and long-term effects of share repurchases. Additionally, investors can gain insight into a firm’s share repurchase motivation by observing its cash balances over time.

Social implications

Share repurchases are a zero-sum game with potentially different short-term and long-term wealth effects.

Originality/value

When studying the wealth effects of share repurchases, it is important to consider the motivations for repurchasing shares as well as the short-term and long-term effects.

Details

Managerial Finance, vol. 45 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 15 August 2019

Shane Anthony Van Dalsem

The purpose of this paper is to investigate whether family firms (FFs) differ from non-family firms (NFFs) in their propensity and likelihood of repurchasing shares. It focuses on…

Abstract

Purpose

The purpose of this paper is to investigate whether family firms (FFs) differ from non-family firms (NFFs) in their propensity and likelihood of repurchasing shares. It focuses on the effects of voting control and managerial control of family members and economic conditions on repurchasing activity.

Design/methodology/approach

This paper employs pooled Tobit and probit models for a sample of 982 US firms for the period 2006 through 2015 and separates the roles of voting control and managerial control on influencing share repurchase decisions.

Findings

This paper provides evidence that FFs have a decreased propensity to repurchase shares relative to NFFs over the sample period. In general, the decreased propensity to repurchase shares is driven by the decision whether to repurchase shares and not the percentage of outstanding market value of equity repurchased.

Practical implications

For critics of share repurchases, this paper provides support for existing literature that FFs provide good long-term stewardship to their firms. In general, it demonstrates that FFs are less likely to repurchase shares than NFFs. Investors that have a preference for or against repurchases can use this information to improve their security selection process.

Originality/value

To date, the effects of family voting and managerial control on share repurchases in the USA has not been considered in the finance literature. This paper adds to the literature by providing evidence that family influence generally results in a lower propensity to repurchase shares.

Details

Managerial Finance, vol. 45 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

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