Stock repurchases, false signaling, and corporate governance: evidence from Korea

Abstract

This paper examines the relationship between frequency of stock repurchase and its intentional false signaling of undervaluation in Korea. We find that the firms repurchase stocks frequently are less undervalued than the firms repurchase stock infrequently, and they have lower post-operating performance than infrequent firms. We find that the agency cost and industry-adjusted Tobin’s Q of the firms negatively affect the abnormal return on stock repurchase announcement, and agency cost and Tobin’s Q increase the probability of frequent stock repurchases. Corporate governance, especially ownership structure and board independence, decreases the probability of false signaling. Our results suggest that frequent stock repurchase firms are more likely motivated by false signaling effect, and corporate governance can mitigate those false signaling caused by agency problem.