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Agency Problems and Stock Repurchases: Evidence from Japan

Author

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  • Min Teng

    (Department of Finance, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan, Hubei 430074, China)

  • Toyohiko Hachiya

    (Graduate School of Commerce and Management, Hitotsubashi University, Japan)

Abstract

This paper examines stock repurchases from an agency perspective by identifying agency costs across three dimensions — interest conflicts and information asymmetry, managerial discretion, and the use of alternative mechanisms to mitigate agency conflicts. We use ownership structure as a proxy for interest conflicts and information asymmetry, employ cash balance and free cash flow as two measures of managerial discretion, and consider cash dividends and interest-bearing liabilities as alternative vehicles for distributing cash. We find that a monitoring structure motivates managers to mitigate agency costs through stock repurchases. Particularly, monitored firms with higher levels of cash balance prefer cash dividends to stock repurchases, whereas monitored firms with more cash dividends repurchase more shares because of their stronger incentive to mitigate agency costs. However, when firms have a very high level of dividends, they substitute stock repurchases for dividends to avoid a dividend cut in the future.

Suggested Citation

  • Min Teng & Toyohiko Hachiya, 2013. "Agency Problems and Stock Repurchases: Evidence from Japan," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(03), pages 1-30.
    • Handle: RePEc:wsi:rpbfmp:v:16:y:2013:i:03:n:s0219091513500161
    DOI: 10.1142/S0219091513500161
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    References listed on IDEAS

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    1. Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2004. "The ownership structure of repurchasing firms," Working Paper 2004/7, Norges Bank.
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    Cited by:

    1. Cuong Nguyen, 2019. "The asymmetry in firms’ mechanisms of cash holdings adjustments: evidence from the G-5 economies," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 429-463, August.
    2. Sheng-Syan Chen & Robin K. Chou & Yun-Chi Lee, 2020. "The effects of executive compensation and outside monitoring on firms’ pre-repurchase disclosure behavior and post-repurchase performance," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 111-158, January.
    3. Joanna Golden, 2018. "The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-41, June.

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    More about this item

    Keywords

    Ownership structure; stock repurchases; agency costs; payout policy;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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