Buyback Activities Research Articles

Stock buybacks in the spotlight

Theoretical Basis The theoretical basis for the case is information asymmetry and signaling theory, with buybacks providing a mechanism for reducing information asymmetry between management and investors. The controversy surrounding buybacks has led to political and regulatory scrutiny, which, consistent with evidence from academic research, may affect corporate behavior. Research methodology The compact case is based on secondary, public information about stock buybacks. All sources used are cited in-text, with full citations included in the references section at the end of the teaching note. Case Overview/Synopsis Stock buybacks, a means of providing returns to shareholders, have recently received increased scrutiny by politicians, media and shareholder activists. Proponents have argued that buybacks result in efficient allocation of capital by returning funds to shareholders, whereas opponents have criticized buybacks for enriching executives, providing tax advantages to shareholders and contributing to income inequality. Corporations did not curtail their use of buybacks after the Inflation Reduction Act of 2022 imposed an excise tax. The case frames the buyback debate in current events and focuses on the buyback activity of Apple. The case provides students the opportunity to analyze alternative ways that companies can provide returns to shareholders, evaluate impacts of buybacks on corporate stakeholders and appraise the reasons for, and implications of, current controversy regarding buybacks. Complexity/Academic Level This compact case is appropriate for upper-level undergraduate or graduate courses in financial accounting, tax and finance. This case provides an opportunity to analyze and evaluate stock buyback decisions in the context of the current controversy related to buybacks.

Share Buyback Trend in India: a Study on the Nexus between Share Buyback Activity and Economic Indicators

Share Buyback Trend in India: a Study on the Nexus between Share Buyback Activity and Economic Indicators

Measuring the price of Australian water

The Murray-Darling Basin is Australia’s largest river system spanning over a million square kilometres and supporting annual agricultural production in excess of $A24 billion. The market for trading in water entitlements linked to this resource seeks to ensure that water flows to its highest value use. The quality of the data produced for these markets is of paramount importance to all participants, whether it be irrigators assessing whether the price offered for their entitlement is fair or a water authority attempting to determine the impact of their intervention through buyback activity. In this paper, we highlight the problem of using median prices when reporting aggregate price levels. We demonstrate that a median-based price index reflects changes in the composition of entitlement sales each month in addition to any general change in aggregate prices. We employ the repeat-sales technique, historically used to construct house price indices, in the novel setting of water entitlement trading to overcome this distortion. JEL Classification: Q25, G10

Board independence tenure and real earnings management: accretive share buyback activities in Malaysia

This study examines the impact of tenure in independent directors and audit committees on accretive share buybacks for real earnings management. Taking a sample of 601 non-financial firms listed on Bursa Malaysia from 2010 to 2015, we use a tobit model to test our hypotheses, where real earnings management is proxied by accretive share buyback. We find a significant effect of the tenure of outside directors on accretive share buyback. Firms with long-serving independent board directors are more likely to undertake real earnings management through accretive share buyback. Evidence is also found that firms with audit committees including long-serving members are more likely to engage in share buyback to maximise reported earnings per share (EPS) for earnings management. Finally, a high percentage of independent directors on audit committees restrain managers from utilising accretive share buyback to manage reported EPS.

Board independence tenure and real earnings management: accretive share buyback activities in Malaysia

This study examines the impact of tenure in independent directors and audit committees on accretive share buybacks for real earnings management. Taking a sample of 601 non-financial firms listed on Bursa Malaysia from 2010 to 2015, we use a tobit model to test our hypotheses, where real earnings management is proxied by accretive share buyback. We find a significant effect of the tenure of outside directors on accretive share buyback. Firms with long-serving independent board directors are more likely to undertake real earnings management through accretive share buyback. Evidence is also found that firms with audit committees including long-serving members are more likely to engage in share buyback to maximise reported earnings per share (EPS) for earnings management. Finally, a high percentage of independent directors on audit committees restrain managers from utilising accretive share buyback to manage reported EPS.

Women in Board of Directors and Real Earnings Management: Accretive Share Buyback in Malaysia

Gender diversity of boards and reporting of earnings are two most debated issues in the corporate world. In this context, the paper explores how the presence of women directors on the corporate board influence real earnings management through accretive buyback programs. Using a sample of 601 firms’ observations that engage in accretive share buyback from 2010-2015, the findings reveal that existence of women directors on the board is associated with less engagement in accretive share buyback activities. We further find that firms with a higher number of independent directors are less likely to practice real earnings management through accretive buyback programs. Our paper contributes to the debate on gender diversity on boards and its influence on the utilisation of accretive buyback programs as a tool to real earnings management.

The Wealth Effects of Share Repurchases in Malaysia

This study aims to assess whether buyback activities in Malaysia are able to provide any economic benefits to shareholders both in the short-term and in the long-run. Specifically this study investigates the price effects on: (a) the announcement surrounding the repurchase intentions and implementation dates, (b) factors affecting the price effects on implementation dates and (c) long-run price effects subsequent to repurchase implementation. Using event study methodologies, this study finds no significant immediate price reactions surrounding repurchase intention dates. However, there is significant evidence of positive abnormal returns in days –5 to +5 surrounding the announcement of repurchase implementation. As for the factors affecting abnormal returns, this study finds that abnormal return responds positively to better prior price performance, dividend yield, directors’ holdings, and fraction of shares repurchased. However, abnormal return responds negatively to the previous amount of cash held, reported earnings per share, and market-to-book value. Using a three year period as a measure of long-run, this study finds that there is no evidence that repurchasing firms experience superior or inferior price performance. This is one of the first studies in Malaysia to examine the long- run wealth effects of share repurchase. Keywords: Share buybacks, shareholders’ wealth, corporate finance, long-run performance, emerging, Malaysia.

The Architecture of Compromise: Why CFOs Might Endorse a 100% Corporate Profit Tax, Repatriate Overseas Profits, Increase Dividends, and Reinvigorate U.S. Equity Capital Market Activity

This brief essay explores modes of compromise and how novel approaches can resolve an impasse. The debate on U.S. corporate tax policy is used as an example. Attempts by bitterly divided parties to compromise on ideological issues by “splitting the difference” can prove a fruitless exercise. That has certainly been the case with regard to U.S. federal tax policy in general and, specifically, with respect to the 9.0% of federal revenues derived from taxation of corporate profits. Some parties are inextricably committed to taxing corporate profits more heavily. Others are equally devoted to reducing the corporate profit tax burden. Efforts to have the parties “split the difference” have at best wrestled effective tax rates marginally up or down from time to time. For years, a stalemate unsatisfactory to all has festered. We observe that, when dealing with irreconcilably opposed parties, a compromise that “bridges the gap” holds more promise for progress than one that “splits the difference”. As applied to the U.S. corporate tax rate debate, lashing together proposals to i) raise the federal corporate tax rate to 100% and ii) allow 100% corporate deductibility of dividend payments might span the divide between those who call for higher corporate tax rates and those who call for lower ones. In a way, each side gets 100% of what it wants. A static analysis indicates such a package would increase corporate tax revenue to the federal government by 146.9%; a dynamic analysis indicates it would cut corporate tax revenue to the federal government by 53.1% but bring a host of important, secondary benefits some of which would result in substantial, additional federal tax revenues. Secondary benefits that might reasonably be foreseen include: • A decline in corporate stock buyback activity • Repatriation of overseas profits • Sharply higher U.S. equity capital markets financing activity • Higher after tax return on equity capital for U.S. investors • Improved governance through discouragement of corporate empire building.

Share buy-backs for a selection of JSE listed companies: An exploratory study

This study undertook to derive share repurchase trends from a small sample of JSE-listed companies over the nine years, 1999 – 2008. The study also draws attention to the particular obstacles to be overcome when conducting research into the unique South African share repurchases environment.The study finds that 33 companies made 71 repurchase announcements (47 general and 24 specific) via the Securities Exchange News Service (SENS) over the period July 1999 until financial year-end in 2008. On average, 59,0% of the total number of shares (and 49,3% of the total value) repurchased under a general authority is not included in the 3% SENS announcements. General share repurchases represent 47,9% of total repurchases in volume (and 60,5% in terms of value). The total number of shares repurchased (excluding share trust purchases) by the 33 companies shows that 56,8% were repurchased by subsidiaries and 17,1% were subsequent repurchases by companies from subsidiaries. (In value, these repurchases represent 53,7% and 17,2%, respectively.)This study therefore concludes that research based on only the 3% SENS announcements of general share buy-backs results in significant understating of actual total share buy-back activities, and that the South African share repurchase environment presents unique challenges. The main obstacle for future South African research in this field however is the lack of comprehensive and accurate share repurchase data as supplied by South African financial data sources.This material is based upon work supported financially by the National Research Foundation. Any opinion, findings and conclusions or recommendations expressed in this material are those of the authors and therefore the NRF does not accept any liability in regard thereto.

Accounting rules? Stock buybacks and stock options: Additional evidence

This paper finds that CEO stock options influence the choice, amount, and timing of funds distributed as a buyback. These results favor a managerial opportunism motive for buybacks over other theories and support two key research expectations – that buybacks impose option-induced agency costs on outside shareholders, and that managers benefit from weak governance and unclear accounting in this choice. CEOs increase their insider selling following a buyback, which also supports a managerial opportunism perspective. Once we control for these agency factors, we find no evidence that buyback activity associates reliably with EPS accretion from the reduction in common shares. We conclude that the popular use of stock buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between buybacks and CEOs’ use of stock options as additional compensation.

Managerial Responses to Initial Market Reactions on Share Repurchases

While most papers in finance literature investigate how the stock market reacts to announcements of corporate events, very few study the opposite, how namely, the manager responds to the information from outside investors. In this paper, we examine this issue, using open market share repurchases. Open market share repurchase offers flexibility for the manager to decide whether or not to buy back shares. Therefore, the manager may refer to the opinions of outside investors and make the decision, based on actual buyback activities. We propose learning, over-confidence and timing hypotheses to interpret the behavior of the managerial response to initial market reaction on the share repurchase announcement. Empirically, if a repurchase announcement abnormal return is low, then the manager tends to achieve the repurchase announced ratio by purchasing more shares. In addition, the investor will positively react to this repurchase in the long run. These empirical findings are consistent with the market timing hypothesis, which implies that managers know the true value of their firms better than the market at the moment of the share repurchase announcement.

Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence

This paper finds that CEO stock options influence the choice, amount, and timing of funds distributed as a buyback. These results support two research expectations - that buybacks impose option-induced agency costs on outside shareholders, and that managers benefit from weak governance and unclear accounting in this choice. Increased CEO insider selling following a buyback also supports this agency cost perspective. Once we control for these option-related factors, we find no evidence that buyback activity associates reliably with EPS accretion from the reduction in common shares. We conclude that the popular use of buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between stock buybacks and CEOs’ use of stock options as compensation.

What Role Taxes and Regulation? A Second Look at Open Market Share Buyback Activity in the UK

This paper re‐examines the evidence on open market share repurchase activity reported by Rau and Vermaelen (2002) for the UK. Using data from the Securities Data Corporation (SDC), Rau and Vermaelen conclude that the level of repurchase activity is trivial. They attribute the low repurchase volume to regulatory restrictions that limit companies' ability to take advantage of an undervalued stock price and conclude that the bulk of repurchase activity that does occur is driven by the desire to generate tax credits for pension funds. Using data collected from a variety of sources, we find that the SDC substantially understates UK open market buyback activity. Based on our more comprehensive dataset we conclude that (a) pension funds' tax considerations are not the primary cause of UK share repurchases and (b) despite the prevailing regulatory environment, underpricing still represents an important determinant of repurchase activity.

Discussion of What Role Taxes and Regulation? A Second Look at Open Market Share Buyback Activity in the UK

<i>Discussion of</i> What Role Taxes and Regulation? A Second Look at Open Market Share Buyback Activity in the UK

What Role Taxes and Regulation? A Second Look at Open Market Share Repurchase Activity in the United Kingdom

This paper re-examines the evidence on open market share repurchase activity reported by Rau and Vermaelen (2002) for the United Kingdom. Using data from the Securities Data Corporation (SDC), Rau and Vermaelen conclude that the level of repurchase activity is trivial. They attribute the low repurchase volume to regulatory restrictions that limit companies' ability to take advantage of an undervalued stock price and conclude that the bulk of repurchase activity that does occur is driven by the desire to generate tax credits for pension funds. Using data collected from a variety of sources, we find that the SDC understates open market buyback activity in the United Kingdom by as much as eighty percent. Based on our more comprehensive dataset we find that (a) pension funds are not the primary cause of U.K. share repurchases and (b) despite the prevailing regulatory environment, underpricing still represents an important driver of repurchase activity.

STOCK BUYBACKS, CORPORATE PERFORMANCE, AND EVA

Most studies of corporate stock repurchase focus on the effect of stock buyback announcements on the stock price performance of companies announcing the programs, and on the corporate motives for undertaking stock buyback programs. The study described in this article examines the effects of actual stock buyback activities on corporate performance, addressing the question whether buybacks are associated with increases in economic value or EVA. In general, the study reports that the operating performance of buyback companies is better than that of non‐buyback companies, and that performance improves in the year following the initiation of repurchasing activities. Although it is not the central focus of this study, the findings are consistent with both the free cash flow and the information signaling hypotheses as motives for engaging in stock buybacks.