The Impact of Regulatory Reform on Stock Repurchases: Evidence from Japan

This study investigates corporate reactions to the deregulation of stock repurchases that began on October 01, 2001, in Japan, by closely examining the motivations for stock repurchases, by which we study firms’ usage of treasury stocks and identify the characteristics of firms that were more likely to increase repurchases in response to deregulation. We found that Japanese firms engaged in stock repurchases to signal undervaluation but not to adjust capital structure or substitute dividend over the sample period. By examining the motivation for signalling undervaluation, we found that firms with relatively high market-to-book ratio or weak incentive to signal undervaluation became more likely to increase stock repurchases compared to firms with a strong incentive to, since former firms repurchased to prepare for undervaluation in the future. Regarding the motivation to engage in stock repurchases to mitigate agency problems, our results show that firms with a high cash flow and a high cash dividend engaged in stock repurchases to reduce agency costs related to excess cash before deregulation rather than after deregulation, since these firms have had much stronger incentive to reduce agency problems, while after deregulation, they were more likely to repurchase for a variety of purposes.