The Determinants of Open-Market Share Repurchase: To Signal or to Control?

Abstract

Firms may repurchase their own stocks not only to distribute wealth to shareholders but also to gain control of the firm. This study explores this possibility from stock repurchase programs for Japanese firms listed in the Tokyo Stock Exchange. We find that ultimate owners of firms with large cash flow to voting right deviation announce stock repurchases more aggressively. It appears that incumbent management teams are wary of the fact that they can become hostile takeover targets. Extending Bagwell’s (1991) argument, we interpret that firms with large deviation between cash flow rights and voting rights are likely to announce large amounts of stock repurchase in order to increase both the cost of gaining a toehold and the price of the offer. We also find that Keiretsu (business group) affiliate firms are most aggressive in repurchasing their own shares when the cash flow rights and voting rights are far off alignment. This is consistent with the view of Claessens et. al. (2000) that firms with low deviation between cash flow rights and voting rights return more cash dividends to shareholders to distribute earnings.