The Effects of Legalizing Open Market Share Repurchases: International Evidence
2019-05-20 09:20:18
by Zigan Wang, The University of Hong Kong

Wednesday, May 8, 2019 | 2:00pm-3:30pm | Room 335, HSBC Business School Building


To causally identify the effects of legalizing the open market share repurchases on firm value and behaviors, we construct a unique dataset of 38 countries’ deregulation laws and utilize the yearly variation across the international markets on the restrictions for identification. We first find that the legalization increases firms’ Tobin’s Q and market value. We hypothesize that the legalization may provide another more efficient way to distribute excess cash and therefore improve firm value and performance. We then conduct a series of empirical tests and the findings support our hypothesis. Firms increase treasury shares holding but the change of dividend payments is mixed and largely insignificant depending on specific measurement, which is consistent with the literature that document dividends’ stickiness. To fund repurchases of their own shares, firms decrease cash holding, capital expenditure, acquisition of other firms’ equity and mergers and acquisitions activities. Those firm behaviors lead to higher operating profitability and stock return. Moreover, the effects are stronger in the markets with no price and volume restrictions of repurchases and the markets with higher net tax rates for dividend income. The effects are weaker to the firms with a higher target payout ratio.