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

Abstract

I examine the role of corporate governance in explaining the wealth effect of firms’ announcing open-market share repurchases and managerial actual buyback decisions subsequent to the announcements. Using exploratory principal component analysis, I identify five factors to proxy corporate governance: centralization, supervision, business risk, objectivity, and dependency. I further construct a governance index for Taiwan to obtain a comprehensive effect from a corporate governance mechanism. I find that the capital market reaction to share repurchases announced for the purpose of signaling undervaluation is more favorable among those firms with better corporate governance. However, the actual share repurchase decision of management subsequent to repurchase announcements is independent of the firms’ extent of corporate governance. My results suggest that small size, the Big 4 accounting firms auditing and high listing requirements are determinants of actual buyback shares while management executes repurchase programs. In addition, the required pre-set execution price range before a repurchase announcement explains part of the completion of repurchase programs. This study supports the notion that a better corporate governance mechanism lends credibility to firms’ open-market share repurchase announcements and is noteworthy in assessing the wealth effect of open-market share repurchase announcements on shareholders’ value.