The Information Content of Open Market Share Repurchase: Corporate Governance or Earnings Management Matters More?
See working paper: Open market share repurchase programs and corporate governance: Company performance (2015)
Abstract
In this paper, we investigate whether corporate governance mechanisms, in particular, the market for corporate control, affects shareholder‟s wealth, both in the short and long run when firms repurchase their shares. Also, we examine whether information content on corporate governance mechanisms subsumes that of earnings management.
We find that repurchasing firms that have less antitakeover provisions (ATPs), being subject more to the disciplinary power of the market for corporate control, experience significantly stronger short run upon and long run abnormal returns after open market share repurchase announcements than those with more ATPs. A zero-investment strategy that buys firms with less ATPs and sells short those with more yields 0.45% (significant at 10%) in the short run and 9.6% per year (significant at 1%) in the long run. The zero-investment alpha that buys firms that manage earnings upwards and sells short those that manage downwards the most is nonetheless insignificant. However, for firms that manage their earnings downwards, the zero-investment alpha on the two extreme ATP portfolio returns a staggering 20.4% (significant at 0.1%). This paper provides evidence that investors respond more strongly to repurchase announcements by well governed firms, in support of information signaling hypothesis and that corporate governance characteristics subsume information content on earnings management.