Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia

Using repurchase reasons provided by Australian companies for their stock repurchase programs, we ask if the market's response is different across repurchase motivations by examining actual daily share repurchases. We find that firms with the undervaluation motive experience a more positive stock price reaction when they report their repurchases to the market. We show that undervaluation motive firms repurchase fewer shares and have a lower program completion rate than other motives firms. During the 1‐year period following the repurchases, undervaluation motive firms do better than their control sample firms whereas other motive firms do not perform better or worse than their control sample firms. Overall, our results suggest that the undervaluation motive is a stronger signal than other repurchase motives, and contrary to the predictions of the standard signaling theories, management statements carry some value for the market. We also present some evidence suggesting that a costly action may not be needed for a signal to be credible.     

The Causes and Consequences of Accelerated Stock Repurchases

We examine the choice between accelerated share repurchase (ASR) and open market repurchase (OMR) as repurchase mechanisms between 2004 and 2007. For a sample of ASRs and OMRs that actually buy shares in the announcement quarter, we find that ASR firms have lower market‐to‐book ratios, less cash, but greater managerial entrenchment. Prior to repurchase, ASR firms are subject to significantly more takeover rumors than OMR firms are, and this, along with entrenchment and undervaluation, affects the choice to use ASRs. ASR firms experience positive average abnormal returns both before and after the announcement. Moreover, the latent takeover probability is significantly lower for both ASR and OMR firms (when compared with pre‐announcement levels), but the reduction for ASR firms is more pronounced. Our results suggest that repurchases, and especially ASRs, indeed make a firm a less attractive prospect for takeover.     

Repurchase Announcements, Lies and False Signals

Prior stock repurchase studies have found evidence that the announcement of a repurchase program sends a positive signal to the market. Firms engaging in open-market repurchase programs do not have to report how, when, and if they actually repurchased any shares. Evidence following the stock market crash of 1987 indicates that many firms announcing repurchase plans did not actually repurchase any share and, by their own admission, had no intention of repurchasing shares. Companies announcing plans and not following through are apparently within the letter of the law. However, we argue that companies announcing plans with no intention of repurchasing shares are guilty of either lying or sending false signals. These companies create distrust in the investment community and intentionally mislead the public in violation of the SEC's antifraud provisions. Changes in the reporting procedures concerning repurchase plans are ethically and legally warranted.     

Credibility of corporate announcements and market reaction: evidence from Canadian share repurchase programs

Do market participants evaluate the credibility of a firm's share repurchase announcement based on the firm's share repurchase history? Using a sample of 1,507 share repurchase programs for firms listed on the Toronto Stock Exchange from 1994 to 2005, we find that 69% of firms fail to acquire the target number of shares specified at announcement and many firms fail to repurchase any shares. We develop credibility indices and find a positive relationship between current announcement abnormal returns and completion credibility of previous announcements. We conclude that the market prices completion credibility of past share repurchase announcements in reacting to current repurchase announcements. Copyright © 2010 ASAC. Published by John Wiley & Sons, Ltd.     

Repurchases of convertible preferred stock and shareholder wealth

In this paper we provide the first comprehensive examination of the stock price reaction to announcements of convertible preferred stock repurchases over the 1981 to 2005 period. We document a positive and significant average common stock abnormal return of 3.27% around announcements of these repurchases. We test signaling and free cash flow explanations for the observed wealth effects by studying abnormal returns and changes in operating performance around repurchase announcements. We find that abnormal returns are positively related to size of repurchases and managerial ownership. We find no evidence of higher stock price reactions for low-q and high free cash flow firms. In addition, we find significant improvements in accounting profitability subsequent to repurchases, but not for low-q firms. Collectively, our results are most consistent with the signaling hypothesis.     

Managerial Overconfidence and Share Repurchases

Following prior studies, we use keywords in press portrayals to gauge managerial overconfidence. We hypothesize that managerial overconfidence is related to a manager's perception that the firm is undervalued. Results from 2744 share repurchase programs launched by 783 listed firms in Taiwan confirm this hypothesis. We find that managerial overconfidence is positively correlated with the intensity of share repurchasing, which is measured by scale, execution, frequency, and the difference between the announced price and post‐execution price. Moreover, the programs launched by overconfident managers were not undervalued and therefore were associated with reduced post‐announcement returns.     

Gibrat's law in marketing: The case of liquor brand sales

We test the applicability of Gibrat's Law in the liquor brand market. Basically, we model annual changes in the unit sales of the top fifty liquor brands as white noise. Our results reject this model, but we do find that changes in sales are independent of starting market sales. This leads to the interpretation that brands with above average market share do not tend to gain market share, i.e., initial market share does not affect the subsequent change in market share. Furthermore, brands with above average sales do not have more stable sales than do firms with below average sales. Changes in sales appear highly positively correlated between periods, i.e., brands that gain sales in one period tend to gain sales in the next. Finally, no major liquor type or manufacturer had consistently and significantly greater or lower success across our various annual time periods.     

Regulatory Sanctions on Independent Directors and Their Consequences to the Director Labor Market: Evidence from China

We investigate the regulatory sanctions imposed on independent directors for their firms’ financial frauds in China. These regulatory sanctions are prima-facie evidence of significant lapses in business ethics. During the period 2003–2010, 302-person-time independent directors were penalized by the regulator (the China Securities Regulatory Commission—the CSRC), and the two stock exchanges. We find that the independent directors with accounting experiences are more likely to be penalized by the CSRC, though they do not suffer more severe penalties than do the other sanctioned independent directors. We also find that independent directors suffer less severe penalties than do the insider directors. These results are consistent with the hypothesis that the sanctions on independent directors are tied to their assumed ethical and legal responsibilities. Following a regulatory sanction, penalized independent directors experience a significant decline in the number of other board seats held. However, they can gain board seats in better quality firms. We find that interlocked firms that share penalized independent directors with the fraud firm do not suffer from a valuation decline. Overall, our results suggest that regulatory sanctions have not triggered further sanctions on the penalized directors in the labor market but they have, instead, created a disincentive for these directors to serve on the company boards of high-risk firms.     

Is There a Gold Social Seal? The Financial Effects of Additions to and Deletions from Social Stock Indices

This study investigates the financial effects of additions to and deletions from the most well-known social stock index: the MSCI KLD 400. Our study makes use of the unique setting that index reconstitution provides and allows us to bypass possible issues of endogeneity that commonly plague empirical studies of the link between corporate social and financial performance. By examining not only short-term returns but also trading activity, earnings per share, and long-term performance of stocks that are involved in these events, we bring forward evidence of a ‘social index effect’ where unethical transgressions are penalized more heavily than responsibility is rewarded. We find that the addition of a stock to the index does not lead to material changes in its market price, whereas deletions are accompanied by negative cumulative abnormal returns. Trading volumes for deleted stocks are significantly increased on the event date, while the operational performances of the respective firms deteriorate after their deletion from the social index.     

Learning to export: Export growth and the destination decision of firms

I find evidence that the geographic expansion of firm exports occurs slowly over time and that a large share of export growth is due to incumbent exporters entering new destinations. New exporters enter large countries and destinations with characteristics similar to their domestic market. Less similar, distant or less developed countries are entered by firms already exporting to other destinations. I formulate a dynamic general equilibrium model to test if these patterns are due to firms learning how to export (as other recent empirical findings have suggested) or other factors considered in the literature. In this model, heterogeneous firms experience learning in the form of market entry costs that depend on export history. Using Russian firm level data, I find that learning plays a significant role in explaining the observed entry patterns, which standard trade models cannot account for.     

Born globals,the choice of globalization strategy,and the market's perception of performance

This paper analyzes which characteristics of born global firms determine their choice for international entry mode. Using a logistic regression analysis, we study 124 newly public firms in the United States that undertake 261 international joint ventures or international acquisitions within the first 6 years of their founding. We find that the market responds positively to announcements of international expansions by born global firms, and that larger, more profitable, and more liquid firms have a higher propensity to engage in joint ventures rather than acquisitions. We also find that the market favors firms that announce joint ventures, rewarding them with significantly positive abnormal returns. Furthermore, while we find that cultural similarity affects mode choice, it does not affect the market's reaction to the announcements.     

Company Delistings from the UN Global Compact: Limited Business Demand or Domestic Governance Failure?

While a substantial amount of the literature describes corporate benefits of corporate social responsibility (CSR) initiatives, the literature is silent concerning why some companies announce CSR initiatives, yet fail to implement them. The article examines company delistings from the UN Global Compact. Delistings are surprising because the CSR agenda is seen as having won the battle of ideas. The analysis proceeds in two parts. I first analyze firm-level characteristics focusing on geography while controlling for sector and size; I find that geography is a significant factor while small firms are more likely to be delisted than large firms and some sector characteristics determine delistings. Next, I proceed to uncover country-level characteristics including the degree of international economic interdependence as well as the quality of governance institutions. Multivariate regression analysis shows that companies are less likely to be delisted from countries where domestic governance institutions are well-functioning. To a lesser extent, I find that firms from countries with international economies are more willing to comply with the UN Global Compact requirements. Countries with a high share of outward FDI/capita have a lower share of delisted firms as do countries that are internationally competitive.     

Impact of institutional reforms and industry structural factors on market returns of emerging market rivals during acquisitions by foreign firms

This paper seeks to understand the joint impact of institutional reforms and industry structural factors on market returns earned by rivals in an emerging market during foreign acquisitions. We use a sample of 238 foreign acquisitions in India during the period 2004–2013 and find empirical evidence to support the notion that institutional reforms, foreign competition and business group competition positively impact the market returns of the rivals of acquired firms. Additionally, we find that the effects of foreign competition and business group competition on rivals’ market returns are shaped by the degree of institutional reforms in the industry, indicating that firms’ market returns in emerging markets during foreign acquisitions can be better understood through the incorporation of the joint role of industry structural factors and institutional reforms.     

Grassroots innovation success: The role of self-determination and leadership style

An increasing number of firms engage in grassroots innovation, i.e., the voluntary generation and development of innovations by any member of an organization, regardless of function or seniority. However, no empirical study to date identifies the determinants of success or failure of grassroots innovation initiatives. We execute a survey study among 3,728 managers in 14 countries, 2,353 of which (63.1%) had already engaged in grassroots innovation. We find that, on average, firms that adopt grassroots innovation outperform firms that do not. We also find that firms that enable (1) employee autonomy, (2) competence development, and (3) relatedness (i.e., helping employees establish mutually beneficial relationships with trusted colleagues) in their grassroots innovation initiatives outperform firms that do not. We document that such effects are contingent on a firm’s institutional environment (i.e., leadership style and market orientation). For instance, the lower the market orientation and the higher the hierarchical leadership of the firm, the higher the performance returns the firm obtains from fostering autonomy and relatedness in grassroots innovation. These findings encourage managers and firms to adopt (or persist in their) grassroots innovation initiatives, to infuse them with sufficient autonomy, competence, and relatedness and match them with the right leadership style.     

Small firm effect: Evidence from Korean stock exchange

The objective of the paper is to examine the small firm and earnings' yield effects on the Korean stock returns during 1982–1988. We find that smaller (or high E/P ratio) firms obtain higher risk-adjusted returns, on average, than larger (or low E/P ratio) firms. We also document that the existence of January effect in Korean stock returns. Unlike the findings for the US market, stock returns of small and as well as large Korean firms are found to be 2 or 3 times higher in January than the other months. However, the well known tax-loss-selling hypothesis can not be used to explained these anomalies because there are no capital tax or loss offsets in Korea.     

Buy,Lie, or Die: An Investigation of Chinese ST Firms’ Voluntary Interim Audit Motive and Auditor Independence

In the Chinese stock market, special treatment (ST) firms are the firms listed as facing imminent danger of delisting, unless they return to profitability after reporting two consecutive annual losses. Some ST firms voluntarily pay substantial fees to their external auditors to conduct interim audits, which are not required by regulations. In this study, we investigate and find that ST firms that pay for voluntary interim audits report greater discretionary accrued earnings, higher non-operating earnings, and higher returns on assets in ensuing annual reports. As a result, these firms are more likely to return to profitability and reduce their delisting risk. Our results, which contribute to the current debate on auditor independence, appear to be consistent with the possibility that ST firms “buy” external auditors’ cooperation to manipulate earnings when faced with the threat of delisting.     

Leveraging entrepreneurship through private investments: does gender matter?

Using project data from a random sample of Phase II research awards from the National Institutes of Health SBIR program, we estimate the relative probability that woman-owned firms are able to attract private investments to fund the transition of the technology developed under the sponsorship of the SBIR program to an innovation to enter the market. We find that women-owned firms are as much as 16% points less likely to attract private investment dollars compared to male-owned firms, factors excluding the size of the SBIR award held constant. Women-owned firms that received larger awards performed substantially better. Although the SBIR program has a legislated directive to increase the participation of woman-owned firms in the program, our findings suggest that it might not be sufficient to overcome market perceptions about the profitability of such investments actually bringing a developed technology to market.     

Understanding Complexity: the Curvilinear Relationship Between Environmental Performance and Firm Performance

The nature of the relationship between environmental performance (EP) and firm performance (FP) of corporations is a long standing and contentious issue in the literature. This study is intended to advance this debate by arguing for the existence of curvilinear relationship and empirically testing the same using survey data on UK manufacturing firms. FP is captured in terms of growth in sales and market share. Our results show evidence for a quadratic relationship—as firms improve their EP, they seem to achieve much higher levels of FP. These results are consistent with the resource-based view of a firm; as firms engage in EP activities, they are able to gain inimitable knowledge that helps in further learning to further improve performance. Based on our results, we suggest that new studies focus on strategies to extend the period of increasing returns and maximizing the benefits of the positive association between EP and FP.     

Impact of the supplier certification program in US firms

The supplier certification program has been expanding in recent years in US industries, as they attempt to gain a competitive edge in the world market. The supplier certification program seeks to improve quality and on-time delivery, to share technology, to establish a long-term and stable relationship with a few suppliers, and to reduce cost. This study investigates whether the supplier certification program is effective or not. The survey responses from 328 eastern and mid-western manufacturing firms indicate that the program has a significant impact on quality, on-time delivery, cooperation and price.     

Robustness of size and value effects in emerging equity markets, 1985–2000

We examine the robustness of size and book-to-market effects in 35 emerging equity markets during 1985–2000. Mean returns for high book-to-market firms significantly exceed mean returns for low book-to-market firms. These findings are robust to tests that control for size effects and that remove extreme returns. Similarly, mean returns for small firms exceed mean returns for large firms. But, the firm size results lack robustness to the removal of extreme returns. Moreover, significant size effects are found in tests that define firm size relative to the local market average, but generally are not found in tests that use absolute firm size. Our findings are confirmed by cross-sectional regressions that control for systematic risk at the global and local levels.