Information Signaling or Agency Conflicts: What Explains Canadian Open Market Share Repurchases?

Abstract

This paper examines open market share repurchases in Canada (called normal course issuer bids, henceforth NCIBs). Similar to announcements of U.S. open market share repurchases, announcements of Canadian NCIBs are accompanied by a significantly positive stock price reaction. But if NCIBs signal information, then it is not in the same manner as U.S. repurchases. Canadian firms usually announce the legal maximum proportion of shares that they are entitled to repurchase (5%) rather than a target proportion as in the U.S. Thus, the signal in Canada is the announcement of the NCIB, not the target proportion. The conditional event study framework adopted in this paper takes into account the discrete nature of the signal and potential endogeneity of the NCIB announcement. As an alternative to signaling, we examine whether NCIBs are used by shareholders as a means of reducing financial slack and thereby ameliorating the costs of agency conflicts. Our estimates show that repurchasing firms in Canada are smaller, have greater free cash flow, and are more closely held than their non-repurchasing counterparts. We conclude that these results support the agency conflict hypothesis and are not consistent with the signaling hypothesis.