The Relationship between Corporate Governance and Open Market Repurchases
Date Issued
2008
Date
2008
Author(s)
Chen, Ni-Yun
Abstract
Corporate governance has a dramatic force to share repurchase decision since the board of directors are responsible for the direction and supervision of the company''s business including the authorization of share repurchase programs. A well governed firm has a more independent, overseen, agreed and less changing, concentrated board structure. A poorly governed firm is just the opposite.ccording to share repurchase programs announced by companied trading in stock exchange market or over the counter from Aug. 2000 to Dec. 2005, this study investigates how corporate governance affects a wide range of open market repurchase activities in the probability of share repurchase announcements, share repurchase frequency, cumulative abnormal returns at announcement of the repurchases programs, announced target levels of repurchases, actual share repurchases and completion rate. Completion rate is the actual repurchases scaled by the target number of shares in the programs. The results indicate that well-governed firms which strongly defend against fraudulent announcements are less likely and frequent to announce share repurchase. They are associated with higher five-day abnormal returns surrounding announcement date, suggesting that governance structure proxies for the quality of management’s information. As managers in a well-governed firm are less likely to manipulate their firm’s stock price by exaggerating the announced size, governance structure is negatively related to the extent of repurchase offer. Although a strong positive reaction to the announcement lowers the firm’s demand for reacquiring securities, governance structure is positively related to completion rate in firms with lower stock returns two months following the announcement of the program.
Subjects
Corporate governance
Board of directors
Open market repurchases
Completion rate
Cumulative abnormal returns
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