Wealth Distribution in Off-Market Share Buybacks: The Effects of Corporate Governance and Institutional Ownership

Abstract

While share buybacks in the classical perfect markets context are well understood, tax rules often distort the wealth transfer in non-obvious ways. Unique Australian tax rules for off-market share buybacks allow buyback participants to receive tax credits and reduced capital gains tax. These rules provide an ideal setting to explore the relative bargaining power of buyback participants versus non-participants. We investigate this tension by examining the influence of institutional holdings on the distribution of wealth in the buyback and investigate whether the strength of a firm’s corporate governance systems has a moderating influence. The results show that higher levels of institutional ownership and excess franking credits lead to a disproportionate distribution of wealth to participants in the buyback. Additionally, firms with stronger corporate governance are able to extract more value for non-participants from the tax credits distributed in the buyback.