Stock repurchase in Korea and equity value of Japanese keiretsu firms

Abstract

Stock repurchases which convey signal to outsider investors are popular increasing payout method instead of dividends. They are rapidly increasing in U.S. and other countries market including Korean market. Of three essays, two essays are the studies about the information of repurchase in Korea. Repurchase in Korea, although allowed since 1994, are more popular and increasing, but studies about it are limited to the investigation of initial market reactions. In Chapter 2, we examine four hypotheses - undervaluation, signaling, free cash flow, and optimal leverage hypotheses - using both short-run and long-run market reactions. We find that the undervaluation hypothesis is most consistent with both short-run and long-run tests. There is underreaction to high B/M firms for 2 year. Improvement in operating performance following repurchase suggests the signaling hypothesis. Of the control variables, the target purchase ratio and ownership by the largest shareholders are found significant, suggesting that the magnitude of repurchase and the ownership increase motive by the largest shareholders are also important factors that explain the repurchase. In Chapter 3, we investigate how stock repurchases are strategically used to support the stock price before and after equity offerings. Repurchases preceding equity offerings influence the offerings in two ways. First, they boost the stock price higher than other repurchases without equity offerings. Second, they convey positive information for subsequent equity offerings by reducing the adverse selection problem. On the contrary, repurchase firms after equity offerings undergo more severe underperformance than other firms offering stock not accompanied by stock repurchase. We find that repurchases, in this case, are used as an effective strategic tool to reverse price drops after the equity offering. In Chapter 4, we examine the association between keiretsu affiliation and corporate equity value in Japan. We expect the k...