Does Corporate Governance Quality Lend Credibility to Open‐Market Share Repurchase Announcements?

Abstract

Manuscript Type Empirical Research Question/Issue Low‐quality firms may use share repurchase announcements to send a false or conflicting message regarding firm value to the capital market. This study examines whether firm‐level corporate governance mechanisms can alleviate this mimicking behavior by affecting managers' buyback behavior following open‐market share repurchase announcements. I further investigate the extent to which differences in corporate governance affect the changes in insider shareholdings and the degree of information content provided in repurchase announcements. Research Findings/Insights Using unique archival data from Taiwan, I find that the capital market reaction to share repurchases announced for the purpose of signaling undervaluation is more favorable for firms with quality corporate governance. The increasing post‐repurchase insider shareholdings confirm the credibility of repurchase announcements for firms with better corporate governance. The buyback outcome subsequent to repurchase announcements is affected by internal corporate governance mechanisms. Furthermore, external monitoring factors, such as having Big Four accounting firms as auditors, listing requirements, and regulatory preset buyback price ranges, also determine the execution rate of repurchase programs. Theoretical/Academic Implications The signaling hypothesis, the leading hypothesis on open‐market share repurchases, suggests that low‐quality firms may engage in mimicking behavior to send a false signal regarding firm value when the signal cost is low. This study provides insight regarding the impacts of firm‐level corporate governance structures on the signaling effects of repurchase announcements, the subsequent insider shareholdings, and the completion of repurchase programs. In addition, this study is the first to analyze the influence of corporate governance mechanisms on the degree of information content in open‐market share repurchase announcements. Practitioner/Policy Implications This study suggests that higher quality corporate governance mechanisms lend credibility to a firm's open‐market share repurchase announcement, which is also noteworthy in assessing the wealth effect of the repurchase announcements on shareholder value. Moreover, the findings suggest that buyback regulations (e.g., preset buyback price ceiling and floor) in Taiwan influence managers' buyback decisions.

Frequent Stock Repurchases, False Signaling, and Corporate Governance: Evidence from Korea

“…Furthermore, Haw, Ho, Hu, and Zhang (2011) show that stock repurchase increases firm value when the country has stronger investor protection, in a study of 33 countries. Similar to our study, using Taiwanese stock repurchase, Wu (2012) shows that governance quality has a positive impact on firm performance and managerial stock repurchase behavior under the assumption that not all the managerial intention of stock repurchase is signaling of undervaluation; intentions may include false signaling or conflicting intentions. Thus, we expect that corporate governance will have a significant effect on firm value around a stock repurchase announcement.…”

“…Therefore, Mitchell and Dharmawan (2007) argue that the Australian stock repurchase sample more clearly detects the signaling incentives of repurchases and that their sample is robust for empirical analysis. Even though the dataset is robust, no explicit measurement distinguishes managers' false signaling intentions from true ones, as Chan et al (2010) and Wu (2012) suggest. However, in this study, we use the frequency of stock repurchases as a proxy for false signaling and show that frequent stock repurchase firms are less undervalued than infrequent stock repurchase firms, which confirms the potential false signaling.…”

“…However, there is room for managers to misuse information asymmetry . Therefore, Wu () argues that poor‐quality firms may pretend to have good quality by sending false signals when the information cost is low, and Kracher and Johnson () argue that abusing information asymmetry with unethical false signals can mislead the market. In a similar vein, Jagannathan and Stephens () argue that the assumption that firms send credible signals of undervaluation on a regular basis in stock repurchase programs is not reasonable, so they argue that the motivation of firms that frequently repurchase stocks is different from that of firms that repurchase stocks infrequently.…”

Ownership structure and firm performance of listed tourism firms

“…Institutional and controlling ownership are respectively the external and internal governance mechanisms (Rediker & Seth, ; Walsh & Seward, ). Although the influence of institutional and controlling ownership on firm performance has been identified in the nontourism sector (Claessens et al, ; Crespi & Renneboog, ; Manikandan & Ramachandran, ; R. S. Wu, ), their impact on the performance of tourism firms is not well documented. In particular, the knowledge of how the industry characteristics are relevant to ownership structure, which in turn influences firm performance in the tourism sector, is limited.…”

Supervisory Board and Company Borrowing: The Case of Developing Economics

“…Further, supervisory board size was identified by the number of supervisory board members in the company (Shan & Xu, 2012). Quality of audit was detected by using a dummy variable; if the annual report of the company shows it was audited by big 4 audit firm, it was given 1 and 0 otherwise (Wu, 2012). Total assets were employed to identify company size (Abor & Biekpe, 2005).…”