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Article
Publication date: 8 February 2024

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.

Details

Benchmarking: An International Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1463-5771

Keywords

Case study
Publication date: 2 February 2024

Katherine Campbell, Dee Ann Ellingson and Jane M. Weiss

The theoretical basis for the case is information asymmetry and signaling theory, with buybacks providing a mechanism for reducing information asymmetry between management and…

Abstract

Theoretical Basis

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.

Research methodology

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.

Case Overview/Synopsis

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.

Complexity/Academic Level

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.

Article
Publication date: 30 March 2022

Srikanth Potharla

The present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences…

Abstract

Purpose

The present study aims to examine the relationship between real earnings management and earnings persistence and also to test how the group affiliation of the firms influences this relationship.

Design/methodology/approach

The study draws the sample of listed non-financial firms in the Indian market from the year 2011 to 2018 and applies panel least squares regression with industry and year fixed effects. Future performance of a firm is measured by one year leading value of return on assets. The interaction term of real earnings management and return on assets is used to measure the impact of real earnings management on earnings persistence. The firm-specific controlling variables are also included in the empirical model. The robustness of the results is tested by sub-dividing the sample into group affiliated and non-group affiliated firms.

Findings

The findings of the study reveal that opportunistic earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in operating cash flows and abnormal reduction in discretionary expenditure. On the other hand, signalling earnings management has a significant impact on earnings persistence when real earnings management is measured through abnormal increase in the level of production. The results also reveal that REM has more negative implications on group affiliated firms compared to non-group affiliated firms supporting the theory of entrenchment effect.

Originality/value

This is the first study in the Indian context which tests the implications of real earnings management on earnings persistence by using three alternative measures of real earnings management. The study contributes to the existing literature on the implications of real earnings management in emerging markets like India.

Details

International Journal of Emerging Markets, vol. 18 no. 11
Type: Research Article
ISSN: 1746-8809

Keywords

Case study
Publication date: 29 September 2023

Sanjay Dhamija and Shikha Bhatia

After working through the case and assignment questions, the learning outcomes of this study are to understand the dividend policy of a company; compare different types of…

Abstract

Learning outcomes

After working through the case and assignment questions, the learning outcomes of this study are to understand the dividend policy of a company; compare different types of dividends that a company may give; assess the impact of stock splits and the issue of bonus shares (stock dividends); compare cash dividend and buy-backs as methods of cash distribution to shareholders; evaluate the methods of cash distribution that may be appropriate for the company; and assess the trade-off between long-term value creation and shareholder expectations.

Case overview/synopsis

This case study presents the dilemma faced by Partha DeSarkar, the executive director and global CEO of Hinduja Global Solutions (HGS) Limited, a leading business process management (BPM) company. The company would have surplus cash of about US$1.2bn from the selling of its health-care service businesses. The company planned to invest a part of this cashflow into the company’s future growth, with some of it distributed among its shareholders. This case study provides an excellent opportunity for students to determine the best method for rewarding the shareholders. It allows students to compare various cash distribution methods. Students can examine in detail the process involved, the quantum of distribution, tax implications, financial implications, fundraising flexibility and valuation impact of available options.

Complexity academic level

This case study is best suited for senior undergraduate- and graduate-level business school students in courses focusing on corporate finance, financial management, strategic management and investment banking.

Supplementary materials

Teaching notes are available for educators only.

Subject code

CSS: 1 Accounting and Finance

Details

Emerald Emerging Markets Case Studies, vol. 13 no. 3
Type: Case Study
ISSN: 2045-0621

Keywords

Article
Publication date: 16 May 2023

Ravinder Singh, C.P. Gupta and Pankaj Chaudhary

The purpose of this paper is to investigate the relationship between dividend policy and the life cycle of firms in India. In addition, this study intends to examine the variation…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between dividend policy and the life cycle of firms in India. In addition, this study intends to examine the variation in dividend behaviour over the life cycle of a firm. The study anticipates that a firm's dividend behaviour varies over its life cycle.

Design/methodology/approach

To scrutinize the validity of the proposition, the authors classify 1968 non-financial industrial firms listed at Bombay Stock Exchange (BSE) into growth, mature and stagnant firms over the period 2000–20. Additionally, to check the robustness of the results, they use an array of techniques such as analysis of variance, pooled ordinary least squares, fixed effects models and random effects models.

Findings

The empirical findings suggest that dividend behaviour varies over a firm's life cycle. Specifically, stagnant firms are paying significantly higher dividends than growth firms. Mature firms are paying significantly higher dividends than growth firms. The results are consistent after controlling the effects of firm's size, profitability, leverage, operating risk, systematic risk and growth opportunities.

Research limitations/implications

The findings are useful for corporate decision makers in establishing an appropriate dividend policy conditional on firms' life cycle stage and for shareholders in making investment decisions.

Originality/value

The relation between dividend policy and firm life cycle has not been examined before in the context of Indian stock market. Thus, this research bridges this gap in the literature.

Details

Managerial Finance, vol. 49 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

Open Access
Article
Publication date: 22 June 2023

Omar Esqueda and Thomas O'Connor

The authors measure the cost of equity to earnings yield differential for a sample of 2,035 non-financial firms. In a series of Logit and Tobit regressions, the authors examine if…

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Abstract

Purpose

The authors measure the cost of equity to earnings yield differential for a sample of 2,035 non-financial firms. In a series of Logit and Tobit regressions, the authors examine if the cost of equity to earnings yield differential is related to dividend policy in the manner predicted by agency theory.

Design/methodology/approach

Agency theory says a firm's optimal dividend policy is partially determined by the relationship between the earnings yield and the cost of equity capital. When the cost of equity is higher (lower) than the earnings yield, firms are motivated to (not) pay dividends as this reduces the cost of capital and holding other things constant, increases corporate valuations. The authors test whether managers set dividend policies to maximize the value of the firm.

Findings

The study’s findings show that when the cost of equity is higher (lower) than earnings yield, firms are more (less) likely to be dividend payers and the payouts are higher (lower). The results are robust to the inclusion of share repurchases as an alternative to cash distributions. The study’s findings support the cost of equity hypothesis and are consistent with alternative dividend theories.

Originality/value

The study’s findings support the cost of equity hypothesis and are consistent with alternative dividend theories. To the authors’ knowledge, this is the first paper testing the cost of equity hypothesis.

Details

Managerial Finance, vol. 50 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 19 March 2024

Benny Hutahayan, Mohamad Fadli, Satria Amiputra Amimakmur and Reka Dewantara

This study aims to analyze the causes and implications of legal uncertainty in the issuance of conventional municipal bonds in Indonesia and to draw lessons from Vietnam’s…

Abstract

Purpose

This study aims to analyze the causes and implications of legal uncertainty in the issuance of conventional municipal bonds in Indonesia and to draw lessons from Vietnam’s approach in providing better legal certainty.

Design/methodology/approach

This study adopts a normative legal method with a legislative approach and applies a comparative approach. Data sources involve primary and secondary legal materials from both Indonesia and Vietnam.

Findings

The legal uncertainty is caused by a lack of coherence and consistency in legislation. Based on Vietnam’s experience, Indonesia can gain valuable insights related to providing strong legal certainty for parties involved in issuing or investing through conventional municipal bonds.

Research limitations/implications

This study focuses on the comparative legal analysis of conventional municipal bonds in Indonesia with Vietnam.

Practical implications

This research provides recommendations for the refinement of legislation regarding conventional municipal bonds to the government.

Social implications

This study is related to legal certainty as a strategy to attract investment through municipal bonds and to ensure the municipal bond issuance process is transparent and efficient.

Originality/value

This study provides a comparative perspective on the issuance of municipal bonds in Indonesia, with a special focus on Vietnam, emphasizing the urgency of harmonization in legal regulation and the sustainability of legal certainty.

Details

International Journal of Law and Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1754-243X

Keywords

Article
Publication date: 14 March 2024

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.

Details

Journal of Accounting Literature, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0737-4607

Keywords

Book part
Publication date: 19 February 2024

Quoc Trung Tran

This chapter introduces dividend policy as both financial and business decisions. First, it presents the history of dividend payment, definition of dividend, and typical types of…

Abstract

This chapter introduces dividend policy as both financial and business decisions. First, it presents the history of dividend payment, definition of dividend, and typical types of dividend. Dividends originate from liquidating payments of sailing vessels in the early 16th century and become popular with the development of corporations. In this book, a dividend is defined as a cash payment to shareholders. By payment time, there are three typical types of dividend including final dividend, interim dividend, and special dividend. Second, it presents definition, important dates, measures, and patterns of dividend policy. Dividend policy includes two decisions: the first is to pay or not to pay dividends, and the second is the dividend magnitude. Investors have to follow important dates of dividend payments in order to make their investment decisions. Important dates include declaration date, record date, ex-dividend date, and payment date. Dividend payout ratio and dividend yield are two common measures of dividend policy. Common patterns of dividend policy are no dividend policy, residual dividend policy, stable dividend policy, and irregular dividend policy. Finally, dividend policy is both financial and business-related decisions. Therefore, dividend decisions are affected by various levels of business environment such as internal, micro (industry), and macro-environment. Dividend theories are the behind mechanisms to explain the effect of each factor in the business environment on corporate dividend policy. Dividend policy, in turn, determines shareholders' wealth through its impact on stock price.

Case study
Publication date: 13 February 2024

Edward D. Hess

In 2007, Best Buy was the leading electronics retailer in the United States with more than 941 stores, revenue totaling $31 billion, and a market cap of $21 billion. In 2005, Best…

Abstract

In 2007, Best Buy was the leading electronics retailer in the United States with more than 941 stores, revenue totaling $31 billion, and a market cap of $21 billion. In 2005, Best Buy had adopted a new business model, culture, and customer-segmentation template called Customer Centricity. This move created volatility in the price of Best Buy stock because of the higher-than-expected employee costs that went with this new way of doing business and the difficulty of executing the old and the new business models simultaneously while the new model was rolled out. Best Buy responded to Wall Street's short-term focus in a myriad of ways. It first asked for investor patience, and stressed the strong operating results achieved in Best Buy stores operating under the new model. But in June 2007, after the stock dropped again, the CEO knew he had to decide whether to open more Best Buy stores, increase the company's dividend, or increase the stock-repurchase program.

Details

Darden Business Publishing Cases, vol. no.
Type: Case Study
ISSN: 2474-7890
Published by: University of Virginia Darden School Foundation

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