Document Type

Journal Article

Department/Unit

Department of Accountancy and Law

Title

Legal institutions, ownership concentration, and stock repurchases around the world: Signal mimicking?

Language

English

Abstract

One of the central puzzles of signaling theory is how to assess signal quality, in particular the potential for signal mimicking. Our study provides evidence of signal mimicking in the context of stock repurchases. Employing an ex-ante proxy for the likelihood of mimicking stock repurchases and data on open market stock repurchases from 30 countries, we find that long-term operating and market performance following stock repurchases improve less for suspected mimicking firms. This finding contradicts the conventional characterization that managers use stock repurchases to signal undervaluation and enhanced future performance. We find that mimicking firms have smaller capital investments, need greater external financing, buy back fewer shares, and issue more new shares (and/or resell more treasury shares) in the year of the repurchase. Our analysis further shows that mimicking is more likely in countries with weak investor protections and in firms with higher ownership concentration. Further, mimicking associated with concentrated ownership is mitigated in countries with stronger investor protections and by the adoption of International Financial Reporting Standards (IFRS). Altogether, our findings provide evidence of signal mimicking in stock repurchases in international data that is influenced by market, ownership, legal, and financial reporting characteristics of countries. © 2013 University of Illinois.

Keywords

Legal institutions, Mimicking stock repurchases, Operating and market performance, Ownership concentration, Signaling

Publication Date

2013

Source Publication Title

International Journal of Accounting

Volume

48

Issue

4

Start Page

427

End Page

458

Publisher

Elsevier

DOI

10.1016/j.intacc.2013.10.004

ISSN (print)

00207063

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