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Corporate governance and the market reaction to stock repurchase announcement

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  • Salim Chahine
  • Mohamad Zeidan
  • Hala Dairy

Abstract

This paper investigates the effect of corporate governance on market reaction around of a stock repurchase announcement. We argue that corporate governance affects the ability of a stock repurchase to alleviate agency costs related to free cash flows, and the credibility of the undervaluation signal sent by the announcement of buyback programs. We find a higher 3-day cumulative abnormal return to programs announced by firms with better corporate governance practices than those with bad governance (1.6% and 0.85% respectively), and the market reaction is significantly higher following the successive scandals in year 2001 (Enron, Arthur Anderson, WorldCom…) and the resulting Sarbanes–Oxley Act of 2002. Further investigations indicate that firms with a lower Free Cash Flow to Asset ratio have a higher market reaction, which is consistent with the information signaling hypothesis, and this is more significant in firms with good governance practices, and following post Sarbanes–Oxley Act. Copyright Springer Science+Business Media, LLC. 2012

Suggested Citation

  • Salim Chahine & Mohamad Zeidan & Hala Dairy, 2012. "Corporate governance and the market reaction to stock repurchase announcement," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(4), pages 707-726, November.
    • Handle: RePEc:kap:jmgtgv:v:16:y:2012:i:4:p:707-726
    DOI: 10.1007/s10997-011-9167-4
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    References listed on IDEAS

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    Cited by:

    1. Chih‐Wei Wang & Jing‐Yu Peng, 2021. "The impact of internal and external factors on the relationship between information opacity and open‐market repurchases," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4085-4118, September.
    2. Lee, Chien-Chiang & Park, Bokyung & Wang, Chih-Wei, 2023. "The effect of asymmetric information disappears: Evidence in share repurchases and market efficiency," Finance Research Letters, Elsevier, vol. 56(C).
    3. Elisa Roncagliolo, 2015. "Managerial discretion in authorising open market share repurchases: empirical evidence from the Italian context," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2015(2), pages 95-116.

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    More about this item

    Keywords

    Corporate governance; Stock repurchase; Sarbanes–oxley; Undervaluation; G30; G32; G34;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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