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Governance and post-repurchase performance

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  • Caton, Gary L.
  • Goh, Jeremy
  • Lee, Yen Teik
  • Linn, Scott C.

Abstract

Payout policies based on share repurchase programs provide greater flexibility than do those based on cash dividends. We develop and test an empirical model in which strongly governed companies outperform weakly governed companies after announcing share repurchase programs. Our findings include positive associations between strong governance and both post-announcement adjusted operating performance and abnormal stock returns. The results are robust to sample selection bias, different sample criteria, governance measurement, and various control variables. In addition, governance strength is associated with larger post-announcement changes in CEO incentive compensation and merger and acquisition activity, both of which we argue are consistent with strongly governed companies using the financial flexibility derived from choosing share repurchases over cash dividends to drive better performance. Consistent with current literature on attenuation of former anomalies, the associations we find between governance and post-announcement performance tend to disappear in the latter half of our sample period.

Suggested Citation

  • Caton, Gary L. & Goh, Jeremy & Lee, Yen Teik & Linn, Scott C., 2016. "Governance and post-repurchase performance," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 155-173.
    • Handle: RePEc:eee:corfin:v:39:y:2016:i:c:p:155-173
    DOI: 10.1016/j.jcorpfin.2016.02.005
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    Cited by:

    1. Sirio Aramonte, 2020. "Mind the buybacks, beware of the leverage," BIS Quarterly Review, Bank for International Settlements, September.
    2. Autore, Don M. & Clarke, Nicholas & Liu, Baixiao, 2019. "Activist investors and open market share repurchases," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    3. Kolari, James W. & Pynnonen, Seppo & Tuncez, Ahmet M., 2021. "Further evidence on long-run abnormal returns after corporate events," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 421-439.
    4. Grosman, Anna & Amore, Mario Daniele, 2021. "Share Repurchases and Board Independence," MPRA Paper 109811, University Library of Munich, Germany.
    5. 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.

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    More about this item

    Keywords

    Corporate payout; Share repurchases; Corporate governance; Long-term performance; Anomaly attenuation;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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