Search results

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.

The authors use logistic regression to predict the probability of a firm’s buyback decision based on a given set of exogenous explanatory variables.

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.

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.

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.

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.

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.

The authors investigate whether the effects of stock buyback announcements on credit default swap (CDS) spread changes for US firms depend on macroeconomic conditions. The authors find that abnormal CDS spreads increase for small-sized firms announced to repurchase a higher share ratio during the normal period. In contrast, abnormal CDS spreads decrease for big-sized firms regardless of the magnitude of the repurchase ratio during the crisis period. The results of this study suggest that the wealth transfer effect dominates the signaling effect for small-sized firms with higher target ratios during the normal period. In contrast, the signaling effect is stronger for bondholders of big-sized firms during the crisis period.

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.

The theoretical basis for the case is information asymmetry and signaling theory, with buybacks providing a mechanism for reducing information asymmetry between management and investors. The controversy surrounding buybacks has led to political and regulatory scrutiny, which, consistent with evidence from academic research, may affect corporate behavior.

The compact case is based on secondary, public information about stock buybacks. All sources used are cited in-text, with full citations included in the references section at the end of the teaching note.

Stock buybacks, a means of providing returns to shareholders, have recently received increased scrutiny by politicians, media and shareholder activists. Proponents have argued that buybacks result in efficient allocation of capital by returning funds to shareholders, whereas opponents have criticized buybacks for enriching executives, providing tax advantages to shareholders and contributing to income inequality. Corporations did not curtail their use of buybacks after the Inflation Reduction Act of 2022 imposed an excise tax. The case frames the buyback debate in current events and focuses on the buyback activity of Apple. The case provides students the opportunity to analyze alternative ways that companies can provide returns to shareholders, evaluate impacts of buybacks on corporate stakeholders and appraise the reasons for, and implications of, current controversy regarding buybacks.

This compact case is appropriate for upper-level undergraduate or graduate courses in financial accounting, tax and finance. This case provides an opportunity to analyze and evaluate stock buyback decisions in the context of the current controversy related to buybacks.

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.

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.

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.

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.

The purpose of this paper is to examine the effects of share repurchase announcements on the stock price of rival firms in the same industry in Vietnam during 2010–2017.

Both event study and t-test are employed to test the effects of share repurchase announcements on rival firms. In addition, cross-sectional analysis by ordinary least square regression is also applied for investigating the heterogeneous effects due to information transfer.

The finding shows that stock repurchase announcements result in a positive and significant valuation effect for both announcing firms and rival firms in Vietnam. Furthermore, the degree of signal to the industry is conditional on the degree of signal about the announcing firms as a contagious effect. Intra-industry effects are more favorable when profit performance of rival firms is good and when leverage of rival firms is low.

Rival firms can seize opportunities surrounding share repurchase announcements in the same industry in Vietnam. However, due to firm characteristics, intra-industry effects of stock repurchases differ among industries.

By examining different methods, the paper attributes valuable results to investigate the stock price behavior of rival firms in the same industry when firms announce stock repurchase in Vietnam.

Director interlocks, with their extended resources and shared experiences, have the potential power to go beyond the basic role of providing advice and monitoring the activities of an organization. Interlocked directors can have a cross-cultural role in manipulating corporate choices and strategies in several areas, including capital structure, based on learned behavior in their internal company. Shareholders and creditors are the two main capital providers for a company. However, their risk return horizons are very different, and policies that benefit one group may not be optimal to the other. Interlocks can act as carriers of sub-par practices that affect the behavior of several organizations. Such transactional and relational activities may increase short-term value for equity shareholders, but increase the risk for the creditors. The purpose of this paper is to examine cross-cultural effects of interlocks on corporate strategies that affect this essential agency relationship.

This paper surveys the extant literature on board interlocks, board practices, equity valuation and credit risk to develop a link between such interlocks and creditor protection. Based on a brief survey of the central concepts of governance and the role of directors, this paper then provides various propositions on the role of interlocking directorships and their effect on the shareholder–creditor agency problem.

Director interlocks, through their linked common practices, have the potential to increase or worsen shareholder–creditor conflicts by magnifying strategic practices like short-termism, earnings management or through its effects on chief executive officer compensation. Such cross-cultural effects persist across ownership structures and cultural differences in governance.

The paper is not an empirical study of the conflict. This paper uses a literature review to arrive at propositions that may impact shareholder–creditor conflicts.

Several studies have shown cronyism and the dense corporate network has been a large factor in the financial crisis that affected both shareholders and creditors. As the influence of creditors grows with the current availability, and therefore increase in debt levels, this conflict can be magnified through homophily inherent in interlocks. For an organization to be successful in its role of protecting all stakeholders, especially the two major providers of equity capital, factors that cause conflicts must be taken into account while developing the tenets of governance policies and, on a regular basis, during the strategic planning process within the organization. Regulations affecting interlocks, including governance policies, must therefore take into account such influences.

Board interlocks act as channels of information between companies, creating a social network where processes and polices are shared and implemented as defined by the concept of homophily. Such management actions reduce both the quality of information available to creditors and their monitoring capabilities. This juxtaposition of shareholder and creditor interest can, therefore, be worsened by director interlocks.

Prior literature has not specifically linked director interlocks and their mutual impact on the culture and strategy of linked corporations to the shareholder–creditor conflict.

Accelerated share repurchases (ASRs) represent an important recent innovation in repurchase methods. Although executives often mention signaling undervaluation as a motivation for ASRs, managing earnings per share (EPS) has been argued as a key alternative motivation in the financial press. This paper aims to investigate whether ASRs are driven by managerial opportunism (i.e. managing EPS) or managerial optimism (i.e. signaling undervaluation) and whether stock market participants see through these motives.

The sample consists of 293 ASRs conducted between 2004 and 2011. Firms suspected of using ASRs to manage EPS (EPS-suspect firms) were identified by examining actual reported EPS, as-if EPS (i.e. EPS that would have been reported in the absence of an ASR), and analysts’ consensus EPS forecasts. A logistic regression of EPS-suspect versus non-EPS-suspect ASR transactions was performed. Analysts’ reactions to ASR announcements and investors’ reactions to post-ASR earnings announcements were examined. Changes in post-ASR operating performance were also analyzed.

Twenty-nine per cent of ASR firms (EPS-suspect firms) would have missed the consensus EPS forecasts had they not implemented the repurchase. Managerial incentives – securing bonuses and maintaining reputation by avoiding EPS misses – appear to lie behind this opportunistic use of ASRs. Upward revision observed in analysts’ EPS forecasts upon the announcement of ASRs is short-lived, indirectly facilitating firms’ use of ASRs to meet or beat consensus forecasts. Investors, however, are not fooled by managers’ use of ASRs as an earnings management device. Unlike EPS-suspect firms, non-EPS-suspect firms exhibit positive abnormal operating performance during the post-ASR period, suggesting that these firms use ASRs as a signaling device rather than as an earnings management device.

ASRs can be used by managers to signal better future performance to investors. However, managers who intend to do so should carefully consider the timing of an ASR. Initiating an ASR when the company is facing the risk of missing analysts’ EPS forecasts may be interpreted as the ASR being motivated by EPS management concerns rather than signaling, diminishing the credibility of a positive signal intended to be conveyed through the ASR. Further, when considering payout policy and executive compensation decisions, corporate boards need to be cognizant of managers’ incentives for undertaking ASRs. The use of ASRs opportunistically to boost EPS is prevalent, and this action is followed by poor performance.

A number of novel results are documented using tests that are methodologically distinct from those used in related previous research. Notably, this is the first study to distinguish between EPS-suspect and non-EPS-suspect ASR firms and examine the determinants as well as consequences of using ASRs as an earnings management versus signaling device. One out of every four ASR firms are EPS-suspects. Analysts react to ASR announcements by only temporarily increasing their short-term EPS forecasts. Investors see through managers’ use of ASRs as an earnings management device. While ASRs are prone to managerial opportunism, a large number of firms use ASRs to communicate favorable information about their future operating performance to investors.

The wealth effect of accelerated stock repurchase (ASR) documented by previous studies is not as large as the authors would have expected. The authors believe that there are potentially important sampling problems in the previous studies, which make the results less reliable. Identifying a number of factors that can possibly affect the announcement-period returns, the purpose of this paper is to reexamine the wealth effect of ASRs.

The paper identifies a number of factors that can possibly affect the announcement-period returns to ASRs which include: whether an ASR announcement in the press is the initiation date or the completion date of the ASR; the size of the ASR program; whether an ASR is part of an open market repurchase (OMR) program; the frequency of ASR announcements by a firm; whether other corporate news is announced simultaneously with an ASR. The paper partitions the ASR sample into three groups, and then examines the wealth effect of these groups.

The empirical results show that the market reacts differently to the announcement of ASR in these three groups. The three-day announcement-period CAR (t=−1, +1) is 3.59 percent for the high-wealth-effect group, 2.01 percent for the medium-wealth-effect group, and 1.48 percent for the low-wealth-effect group. The paper also identifies the size of the ASR program, whether the ASR is announced simultaneously with an OMR or not, and the frequency of ASR announcements are the most important determinants of the announcement-period abnormal returns.

These findings suggest that the weaker wealth effects of ASRs that have been documented in previous studies are due to sampling related issues.