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


  • Ruei-Shian Wu

Address for correspondence: Ruei-Shian Wu, Yuan Ze University, College of Management, 135 Yuan-Tung Rd, Chung-Li 32003, Taiwan. Tel: 886-3-463-8800 ext.2195; Fax: 886 -3-463-3845; E-mail:


Manuscript Type


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.