Effect of Treasury Shares on Firm Value: Evidence from Korea

Abstract

This study examines how treasury shares held by Korea’s publicly traded firms may affect firm value. Unlike in the U.S., where repurchased shares are immediately subtracted from market capitalization, and thus, constitute a genuine payout mechanism, Korean stock market practice retains the value of repurchased shares in market capitalization, effectively treating treasury shares as a form of an asset. Korean investors do not consider share repurchase as a payout mechanism until the repurchased shares are formally cancelled. We find that share repurchases are followed by positive market reactions, which is consistent with the results of previous research, but the reactions are even larger on the cancellation disclosure date. More importantly, firms with larger treasury shares in stock exhibit a 24% lower Tobin’s q compared to those firms with smaller treasury shares. These findings suggest that the market anticipates that treasury shares may be used as a potential antitakeover measure at a later date, which is reflected in the current market value.