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Demystifying the paradoxical popularity of stock buybacks in a market environment characterised by high stock prices

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  • Ndayisaba, Gilbert A.
  • Ahmed, Abdullahi D.

Abstract

Since the inception of the Corporation Amendment Act in 2011 to improve Director and Executive remuneration accountability, Australian corporations have been conducting gigantesque stock buyback programs (SBPs) on an unprecedented scale. This paper aims to develop an optimisation model that rationalises the relationship between SBPs and equity incentive plans (EIPs) for a risk-averse employee before quantifying the net effect of SBPs on the EIPs. To incorporate their interdependencies, we model EIPs and SBPs as a system of simultaneous equations and estimate this system using two stage least squares. Consistent with the optimisation model’ predictions, obtained coefficients indicate that managers may be conducting on-market SBPs to increase the value of equity incentive payoffs. Additional path analysis reveals that managers of low-quality earnings firms are likely to conduct SBPs to increase per-share earnings and maximise their equity incentive payoffs, especially during the economic slowdown period where other firm shareholders may be facing a sizable decline in their wealth. These findings provide a deeper understanding of how SBPs may serve as an incentive to reduce agency problems or as a tool of wealth transferring among stakeholders.

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  • Ndayisaba, Gilbert A. & Ahmed, Abdullahi D., 2021. "Demystifying the paradoxical popularity of stock buybacks in a market environment characterised by high stock prices," International Review of Financial Analysis, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002337
    DOI: 10.1016/j.irfa.2021.101907
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    2. Cosmin Octavian Cepoi & Victor Dragotă & Ruxandra Trifan & Andreea Iordache, 2023. "Probability of informed trading during the COVID-19 pandemic: the case of the Romanian stock market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.

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    More about this item

    Keywords

    Stock buyback programs; Earnings per share; Equity incentive plans; Governance; Risk-averse employees; Australian evidence;
    All these keywords.

    JEL classification:

    • 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
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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