Does Corporate Governance Quality Lend Credibility to Open-Market Share Repurchase Announcements?
Article first published online: 9 SEP 2012
© 2012 Blackwell Publishing Ltd
Corporate Governance: An International Review
Volume 20, Issue 5, pages 490–508, September 2012
How to Cite
Wu, R.-S. (2012), Does Corporate Governance Quality Lend Credibility to Open-Market Share Repurchase Announcements?. Corporate Governance: An International Review, 20: 490–508. doi: 10.1111/corg.12003
- Issue published online: 9 SEP 2012
- Article first published online: 9 SEP 2012
- the National Science Council. Grant Number: 99–2410-H-155-016-MY2
- Corporate Governance;
- Agency Theory;
- Open-Market Share Repurchase;
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.
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.
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.
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.