Economic shock and share repurchases

Using the most recent financial crisis as a natural experiment, we examine firm valuation, capital structure adjustment, and takeover deterrence as motives for share repurchases. We find that both overvalued firms and low levered firms are more likely to announce share repurchase programs and buy back more shares following the repurchase announcements. Potential target firms are more likely to announce larger share repurchase programs, but there is no significantly positive relation between the takeover probability and the completion rate. We also find that the decision to announce share repurchase and the decision to actually buy back shares following the repurchase announcement are separate to some extent.     

股份回购与公司资金成本：财务风险视角

以2005—2022年沪深A股上市公司股份回购数据为样本,考察回购前后资金成本变化情况,发现股份回购后企业资金成本呈上升趋势,其中,对于财务风险大的公司,回购导致资金成本上升的情况更加明显。进一步研究也表明,财务风险大的公司,在回购宣告后,其长期市场反应也更差。研究从资金成本角度解释了当前中国股份回购长期价值缺失的原因,揭示出股份回购的长期价值效应受企业内部条件的作用。     

Auditor choices and auditor reporting practices: evidence from Finnish small firms

Abstract

This paper examines whether book-tax conformity (i.e. reducing the gap between financial and taxable incomes) can restrain managers from opportunistically reporting financial profits and taxable income. Empirical work on this relation so far is limited and provides contradictory results. Using publicly available financial statements from 1994 to 2007 for 16,739 firms across 32 countries, I construct a new proxy for mandatory conformity and document that high book-tax conformity is associated with lower levels of earnings management and tax avoidance. These results persist even after controlling for firm characteristics and institutional factors, such as legal enforcement, investor protection, legal systems, capital market development, and the adoption of International Financial Reporting Standards (IFRS). Additional tests reveal that the deterrent effect of conformity on earnings management is more pronounced in code-law countries but does not differ between IFRS and non-IFRS adopters, and between developed and developing capital markets.     

Why do reits engage in open-market repurchases?

We investigate why real estate investment trusts (REITs) still engage in open-market repurchases given the unique 95 percent payout requirement. We provide evidence that the motivations for REITs to repurchase stocks are different from those of unregulated firms found by the existing literature. Instead of using funds from operations, REITs appear to finance stock repurchases by issuing new debt and/or selling assets and investments. Unlike ordinary corporations, REITs stock repurchases are not motivated by cash distribution, capital structure, and undervalued equity. However, REITs are more likely to buy back stocks when employees own a higher level of stock options. Also, we find that REITs are more likely to buy back stocks when they have a higher institutional ownership and/or inside ownership.     

On-the-job training and rigidity of employment protection in the developing world: Evidence from differential enforcement

This paper analyzes the causal effect between strict employment protection regulations and the firm incentive to invest in job training of their employees. We explore a large firm level data set across several developing countries and assume that the rigidity of labor regulations affects more the investment decision of firms that faces a rigid enforcement of labor regulations. Our findings show that differences across countries in the enforcement of more rigid employment protection regulation are associated with very small differences in the investment in job training across firms. This finding is robust across several specifications and samples.     

Long-run stock performance following stock repurchases

Studies examining long-term performance after stock repurchases provide mixed results. I point out two substantive problems in samplings of early studies. First, we should distinguish whether or not firms actually repurchase shares following announcements of repurchase programs. Second, as some firms frequently announce repurchase programs, we should consider overlapping announcements during the performance estimation period to avoid any confounding effects. Using a sample that corrects for these problems and the calendar portfolio regression method, I find strong evidence that firms that announce repurchase programs infrequently and repurchase shares actually experience significant long-term abnormal returns. These findings provide an explanation of why some previous studies failed to find significant positive long-term performance.     

Economic policy uncertainty and cost of debt financing: International evidence

Prior research shows that economic policy uncertainty affects a wide range of corporate financial decisions; however, there is little research on the relationship between economic policy uncertainty and cost of debt financing across countries. In this paper, we argue that economic policy uncertainty affects cost of debt financing through two mechanisms including information asymmetry and default risk. With a sample of 163,243 firm-years across 17 countries from 2003 to 2016, we find that economic policy uncertainty positively affects cost of debt financing and this effect is stronger during the global financial crisis from 2008 to 2009. Moreover, our research findings show that large firms’ debt financing cost is less affected by economic policy uncertainty.     

Share repurchases,shareholder rights,and corporate governance provisions

Grounded in agency theory, this study seeks to explore how repurchase activity is influenced by the strength of shareholder rights. The empirical evidence shows that firms where shareholder rights are weaker tend to repurchase less stock. I argue that this is because managers of firms with weak shareholder rights are better able to exploit the weak shareholder rights and retain more cash within the firm, potentially to extract private benefits as alleged by the free cash flow hypothesis. Managers of firms with strong shareholder rights, on the contrary, are forced to disgorge cash to stockholders in the form of repurchases. In addition, I test the dividend-substitution hypothesis and find no evidence that repurchases substitute for dividends.     

以退市为目的之股票回购的时机选择与定价影响因素——中石油回购旗下三家上市公司流通股的案例研究

2005年10月,中石油向下属3家上市公司(辽河油田、锦州石化、吉林化工)流通股股东同时发出回购要约,成功回购后,3家公司股票终止交易,退出市场。文章以此次收购为研究对象,从收购方财务状况、被收购方股票价格、法律环境变迁和规避股权分置改革等几个方面分析了中石油对回购时机的准确把握和对相关法律、政策的成功规避,有效地降低了回购成本。文章还讨论了溢价的影响因素、溢价的合理性和流通股股东在回购中所处的不利地位。本案例中,中石油对回购时机的把握及其定价策略将对其他公司的回购具有借鉴意义。     

Auditor Industry Specialization,Political Economy and Earnings Quality: Some Cross‐Country Evidence

Using cross‐country data, we evaluate the impact of investor protection on the association between earnings quality and audits by industry specialists. Our findings show that the positive association between industry specialist auditors and earnings quality as documented in the literature is affected by the political electoral system, which reflects investor protection rights in a country. We document that audits by industry specialists are associated with higher earnings quality in countries with the proportional electoral system, reflecting weak investor protection. Our results also confirm Kwon et al.'s findings that overall there is a positive association between earnings quality and audits by industry specialists in countries with weak legal enforcement. Our findings, however, indicate that Kwon et al.'s results are valid only for countries with weak investor protection reflected by the proportional electoral system and not for countries with strong investor protection reflected by the majoritarian electoral system. These findings thus suggest that higher earnings quality of firms audited by industry specialists across countries can especially be expected when investor protection is low and legal enforcement is also weak. In addition, our research suggests that future cross‐country studies could explicitly consider the role of the political electoral system of a country in evaluating corporate governance, management and accounting issues.     

Is corporate payout taxation a long run phenomenon? Evidence from international data

This paper examines whether dividend and capital gains taxation influences corporate payout policy using the country level data of 21 countries in panel versions of time series models. We find that dividend relative to capital gains tax penalty is cointegrated with corporate payouts (dividends and share repurchases) i.e. corporate payout taxation may be a long run phenomenon. Further, the cointegrating vector estimates are largely consistent with the traditional view of dividend taxation whereby the tax penalty discourages dividends, while the estimates give limited support to the premise that firms substitute dividends for share repurchases in response to an increase in dividend tax penalty. Long run causality also operates between the tax penalty and payouts in the error correction models. Additionally, dividend tax appears to be more influential than capital gains tax on dividend payout decisions. Lastly, taxation affects dividends more significantly in countries with high investor protection.     

Insider trading around open-market share repurchases

We examine insider trading around open-market share repurchases and find that insiders trade passively in 3 months prior to repurchase announcements and in up to 12 months following the announcements. Furthermore, both pre-announcement and post-announcement abnormal insider trading is unrelated to short-term announcement returns but correlated with long-term post-announcement returns. Our results indicate that corporate insiders trade passively around repurchase announcements in accordance with their perceived undervaluation to exploit the long-run abnormal stock returns related to the events.     

Duration of share repurchase programs and firm performance

It is widely known that under asymmetric information, share repurchasss can be used by firms to signal firm quality. In this paper, it is shown that the duration of share repurchase programs can signal the degree of firm quality. The model predicts that the highest quality firms repurchase a fraction of their shares outstanding over a short duration, medium quality firms repurchase the same fraction over a longer duration, and low quality firms do not repurchase shares at all. An empirical investigation of firms that engage in repurchase activity supports the model.     

Payout initiation by IPO firms: The choice between dividends and share repurchases

This study evaluates the economics of the choice of form of payout initiation mechanism adopted by IPO firms. Our results suggest that IPO firms demonstrate a preference for repurchases over dividends as the specific form of payout initiation mechanism. We however, find that while the market views post-IPO payout initiations favorably, it is indifferent to the specific form of payout mechanism adopted. Further, we find that dividends and repurchases represent distinct payout mechanisms adopted by IPO firms with fundamentally different characteristics and motivation to initiate payouts during the post-IPO phase. Our results suggest that while dividend initiations are primarily driven by life cycle and catering theory considerations, signaling theory provides the more likely explanation for payout initiations through share repurchases.     

The effectiveness of price-stabilizing share buybacks: Evidence from listed firms in Vietnam

The majority of share buybacks in Vietnam involve the sole stated purpose of price stabilization. Using a sample of repurchases announced in 2008–2016 and control firms based on propensity score matching, we find the Vietnamese repurchases to be effective in stabilizing prices and enhancing liquidity. Utilizing the special disclosure features in Vietnam that allow clearly-defined sub-windows of pre-trading, trading, and post-trading, we further examine the different mechanisms of market reactions and actual firm buyback transactions in the buyback process. We document significantly higher abnormal returns over the pre-trading window driven by market reactions, and improved liquidity and reduced volatility over the firm’s actual transaction window for the buyback firms. We also report a significant moderating effect of target shares announced and actual shares repurchased depending on the sub-window under examination. We do not find any evidence of effectiveness in the post-trading window or over a longer-term beyond the buyback period.     

Financial liberalization and firms’ capital structure adjustments evidence from Southeast Asia and South America

This paper investigates the impact of financial liberalization on the adjustment of debt ratios in 12 emerging markets using firm-level data from 1991 to 2004. The results support the central hypothesis of this paper that adjustment costs are important in explaining firms’ adjustment toward their debt ratio targets. Our results show that deviations from targets are halved within 1.09 years in South America and 1.19 years in Southeast Asia, suggesting speed of adjustment is relatively faster in South American countries than Southeast Asian countries. Furthermore, our results show that after full liberalization those countries where rule of law and creditors rights were properly enforced, firms had higher adjustment speed compared to those countries where such enforcement was not present.The estimated adjustment coefficients imply that on average firms’ adjustment speeds have increased in all South American countries over the period of financial liberalization. On the contrary, firms’ adjustment speeds did not increase in Southeast Asian countries, reflecting the uneven effect of liberalization on the firms’ financing behaviour in Asian countries. There was a significant reduction in time (in years) taken to half the gap between actual debt ratios and targets only in Pakistan and South Korea. This finding supports the idea of uncertain impact of financial liberalization programs on the domestic financial markets in those emerging markets which started opening up their market and integrating with the rest of the world latter than others. These findings have significant implications for the sequence of banking sector liberalization in the emerging markets.     

Do the differences in legal systems hinder international enterprises’ debt financing?

This study examines the impact of the differences in the legal system concerning obligation claim rights between host and multinational enterprises' (MNEs) home countries on bank credit financing by constructing a legal system distance index including four dimensions. Using 57,526 firm-year panel observations of 7,257 firms from 53 countries operating in China, the results find that legal system distance has a negative impact on foreign firms' debt financing. The influential mechanism is due to the increasing transaction costs. Further test finds that the negative effect declines as the cultural differences increase. The heterogeneity analysis finds that the negative impact of the legal system distance on the debt level is more pronounced for those foreign firms with a large scale, short operating age, not enough collateral, and sales in the domestic market, but shows no significant differences between a sole proprietorship and joint ventures. This study not only expands the literature on “Law and Finance” but also provides an implication for foreign firms' debt financing in the emerging host country.     

International Financial Reporting Standards and Private Firms’ Access to Bank Loans

Prior research has focused on publicly listed firms when examining the economic consequences of adopting International Financial Reporting Standards (IFRS). This study extends the literature by examining the ability of private firms to attract bank loans through the use of IFRS. Based on firm-level data from 25 countries, we show that private firms that voluntarily use IFRS are associated with a higher propensity to attract debt from foreign banks. We find no such association when examining their relationships with domestic banks. Supplementary analyses show that the results are mainly driven by private firms operating in countries with strong regulatory enforcement. The findings suggest that, conditional on adequate enforcement, the use of IFRS provides useful information for foreign non-relationship banks.     

Investor legal protection,capitalized development costs,and audit fees: A cross‐country analysis

Our study explores the association between capitalized development costs and audit fees. International Accounting Standard No. 38 stipulates the discretion to capitalize the development costs of internally generated intangible assets. We find a positive association between capitalized development costs and audit fees, which reflects auditors’ concern that managers may use the discretion of development cost capitalization to manipulate earnings. Moreover, this positive association is mitigated by stronger investor legal protection because stronger investor legal protection alleviates the earnings management concern from capitalized development costs. These results suggest that country‐level legal regimes affect auditors’ perception on client firms’ accounting choices. Our study contributes to the literature exploring how legal regimes affect auditor behaviors.     

Institutional quality and corporate financing decisions around the world

We investigate the influence of the recent comprehensive institutional quality dimensions of Karolyi (2015), such as market capacity, operational efficiency, foreign accessibility, corporate transparency, legal protection, and political stability, on financing decisions of firms across 56 countries between 2000 and 2015. We find that stronger institutional quality or lower fundamental risks in a country ease firms' access to long-term debt, and equity financing. We attribute our results to institutional environments influencing financing decisions by shaping the severity of market frictions, such as agency conflicts and information asymmetry, and transaction costs. As a result, we conclude that any improvement in a country's institutional environment will boost firms' access to long-term financing, and thus longer-term investments that promote countries' economic growth will be more feasible. Our findings are robust to potential endogeneity issues.