Browse > Article
http://dx.doi.org/10.15207/JKCS.2017.8.3.225

A Converging Approach on the Effect of Stock Repurchases on Cost of Equity  

Kim, Young-Whan (College of Business Administration, Chonnam National University)
Choi, Sungho (College of Business Administration, Chonnam National University)
Publication Information
Journal of the Korea Convergence Society / v.8, no.3, 2017 , pp. 225-235 More about this Journal
Abstract
Firms employ one of two stock repurchasing methods, either direct open market repurchase or indirect repurchase through trust contracts. Since these two methods have some regulatory differences, managers of firms may use a repurchasing method as a signal to convey the information to the market. Therefore, this study investigates the relationship between stock repurchasing methods and implied cost of equity of firms. The results show that there is a significant and negative relationship between stock repurchase announcement and cost of equity. In addition, the implied cost of equity for firms employing direct open market repurchase is significantly lower than those of firms that use indirect repurchase method. Overall, the market accurately reflects the information conveyed by two stock repurchasing methods into cost of equity of firms.
Keywords
Stock Repurchase; Direct Open Market Stock Repurchase; Indirect Stock Repurchase through Trust Contracts; Implied Cost of Equity; Convergent Signaling Effects;
Citations & Related Records
Times Cited By KSCI : 3  (Citation Analysis)
연도 인용수 순위
1 Y. Kim, S. Jung, "The Determinants of Stock Repurchase Methods and the Test of Opportunistic Behavior Hypothesis", Korean Business Review, Vol. 37, pp. 1205-1232, 2008.
2 J. Ohlson, "Earnings, Book Values, and Dividends in Equity Valuation", Contemporary Accounting Research, Vol. 11, pp. 661-687, 1995.   DOI
3 T. Vermaelen, "Common Stock Repurchase and market Signaling-An Empirical Study", Journal of Financial Study, Vol. 9, pp. 139-183, 1981.
4 L. Y. Dann, "Common Stock Repurchase: An Analysis of Returns to Bondholders and Stockholders", Journal of Financial Economics, Vol. 9, pp. 113-138, 1981.   DOI
5 J. Lakonishok, T. Vermaelen, "Anomalous Price Behavior Around Repurchase Tender Offers", Journal of Finance, Vol. 45, pp. 455-477, 1990.   DOI
6 W. J. McNally, "Open Market Stock Repurchase Signaling", Financial Management, Vol. 28, pp. 55-67, 1999.   DOI
7 S. Jung, Y. Lee, "Stock Repurchasing Strategy and Firm value", Korean Journal of Finance, Vol. 14, pp. 59-88, 2001.
8 C. Woo, Y. Shin, "An Empirical Study on the Information Effects of", The Journal of Finance and Banking, Vol. 2, pp. 97-114. 1996.
9 C. Kim, "An Empirical Study on Effects of Repurchasing Management on Korean Stock Market", The Korean Journal of Finance Association, Vol. 13, pp. 169-195, 1997.
10 T. Lee, C. Kim, B. Lim, "A Study on Stock Prices after the Repurchase Tender Offers", Korean Journal of Financial Management, Vol. 18, pp. 193-213, 2000.
11 W. R. Gebhardt, C. M. Lee, B. Swaminathan, "Toward an Implied Cost of Capital", Journal of Accounting Research, Vol. 39, pp. 135-176, 2001.   DOI
12 M. Jung, "The Wealth Effects of Stock Repurchase on Shareholders and Bondholders", The Korean Journal of Finance, Vol. 18, pp. 67-99, 2005.
13 A. Dittmar, "Why do firms repurchases stock?" Journal of Business, Vol. 73, pp. 331-355, 2000.   DOI
14 K. Kahle, "When a buyback isn't a buyback: open market repurchases and employee options", Journal of Financial Economics, Vol. 63, pp. 235-261, 2002.   DOI
15 S. Yoon, J. Kim, M. Lee, "Motives for Stock Repurchases", The Review of Social & Economic studies, Vol. 23, pp. 85-120, 2004.
16 J. Claus, J. Thomas, "Equity Premia as Low as Three Percent?: Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets", Journal of Finance, Vol. 56, pp. 1629-1666, 2001.   DOI
17 S. Ahn, S. M. Cha, Y. W. Ko, Y. K. Yoo, "Implied Cost of Equity Capital in Earnings-Based Valuation Model: Evidence from Korea", Asia-Pacific Journal of Financial Studies, Vol. 37, pp. 599-626, 2008.
18 J. M. Fried, "Open Market Repurchases: Signaling or Managerial Opportunism?", Theoretical Inquiries in Law, Vol. 2, pp. 865-894, 2001.
19 W. Sul, S. Kim, "Stock Repurchase, Stock Dispositions, Announcement Effects, Shareholder Wealth, Financial Strategy", Korean Journal of Financial Management, Vol. 22, pp. 37-69, 2005.
20 T. Oh, G. Bae, "The Stock Repurchase Announcement Effect of Financial Company", Korean Journal of Risk Management, Vol. 9, pp. 1-23, 2012.
21 J. M. Fried, "Informed Trading and False Signaling with Open Market Repurchases", California Law Review, Vol. 93, pp. 1323-1386, 2005.
22 D. Chou, J. Lin, "False Signals from Open-Market Stock Repurchases Announcement: Evidence from Earnings Management and Analysts' Forecast Revisions" SSRN Working Paper, 2004.
23 J. Byeon, "Open-market Repurchase, Signaling Hypothesis, Agency Problem, False Signaling, Long-term Performance", The Journal of Korean Securities Association, Vol. 33, pp. 207-248, 2004.
24 J. Byeon, M. Pyo, "Stock Repurchase, Signaling Hypothesis, Agency Problem, False Signaling, Managerial Opportunism Hypothesis", Korean Management Review, Vol. 35, pp. 695-716, 2006.
25 M. Bagnoli, R. Gordon, B. L. Lipman, "Stock Repurchase as a Takeover Defense", Review of Financial Studies, Vol. 2, pp. 423-443, 1989.   DOI
26 D. J. Denis, "Defensive Changes in Corporate Payout Policy: Share repurchases and Special Dividends", Journal of Finance, Vol. 45, pp. 1433-1456, 1990.   DOI
27 S. Kim, "Information Content of Stock Repurchase : Focused on Expansion of Limited Repurchases", Korean Journal of Financial Studies, Vol. 9, pp. 69-93, 2003.
28 W. Lee, S. Choe, "Effect of Changes in Analysts' Investment Recommendation Ranking on Stock Returns and Trading Volumes", Korean Journal of Financial Studies, Vol. 32, pp. 1-44, 2003.
29 S. Koh, "A Converging Approach on Investment Strategies, Past Financial Information, and Investors' Behavioral Bias in the Korean Stock Market", Journal of the Korea Convergence Society, Vol. 7. No. 6, pp. 205-212, 2016.   DOI
30 Y. Song, J. Lee, "Study for the Estimation Cost of Equity: Empirical Analysis Considering Size and BV/MV", Korean Journal of Financial Management, Vol. 14, pp. 157-181, 1997.
31 J. Cho, M. Jo, "The Relation between Information Asymmetry and the Cost of Capital", Daehan Journal of Accounting, Vol. 12, pp. 269-288, 2007.
32 H. Byun, S. K. Kwak, L. S. Hwang, "The Implied Cost of Equity Capital and Corporate Government Practices", Asia-Pacific Journal of Financial Studies, Vol. 37, pp. 139-184, 2008.
33 H. Ahn, S. Choi, "The Effect of IR on the Implied Cost of Equity", Korean Journal of Business Administration, Vol. 24, pp. 3177-3203, 2011.
34 H. Ahn, S. Choi, "The Effect of Accounting Information Quality on Cost of Equity", Asian Review of Financial Research, Vol. 28, pp. 37-69, 2015.
35 E. Fama, K. French, "The Cross-section of Expected Stock Return", Journal of Finance, Vol. 47, pp. 427-465, 1992.   DOI
36 P. Easton, "PE Ratios, PEG Ratios, and Estimating the Implied Expected Rate of Return on Equity Capital", The Accounting Review, Vol. 79, pp. 73-96, 2004.   DOI
37 S. Ji, "A Convergence Study on the Effect of Investor Relation on Financial Ratios", Journal of the Korea Convergence Society, Vol. 8. No. 1, pp. 181-186, 2017.   DOI
38 I. Lee, S. Joo, "A Study on Motives for Stock Repurchases", The Korean Journal of Financial Studies, Vol. 11, pp. 243-273, 2005.
39 J. C. Persons, "Signaling and Takeover Deterrence with Stock Repurchases: Dutch Auction versus Fixed Price Tender Offers", Journal of Finance, Vol. 49, pp. 1373-1402, 1994.   DOI
40 T. Yeon, "A study on the Defense of Corporate Governance and Repurchases" Studies on the market for corporate control in Korea, KDI, pp. 287-336, 2005.
41 G. W. Fenn, N. Liang, "Good News and Bad News about Share Repurchases", SSRN Working Paper, 1998.
42 G. Grullon, R. Michaely, "The Information Content of Share Repurchase Programs", Journal of Finance, Vol. 59, pp. 651-680, 2004.   DOI
43 K. Kim, S. Yoon, "Study on the restrictions of and the motives for stock repurchases", Business Law Review, Vol. 19, pp. 133-161, 2005.
44 M. Shin, J. Lee, "The Tests of Free Cash Flows Hypothesis about Stock Repurchase", the Korean Journal of Financial Management, Vol. 24, pp. 59-83, 2007.
45 G. Grullon, R. Michaely, "Dividends, Share Repurchases and the Substitution Hypothesis", Journal of Finance, Vol. 57, pp. 1649-1684, 2002.   DOI
46 W. Sul, S. Kim, H. Jang, "Effects of Stock Repurchase on Firm's Dividends and Long-term Performance", Korea Industrial Economics Association, Vol. 17, pp. 1291-1315, 2004.
47 L. S. Bagwell, J. B. Shoven, "Cash Distribution to Shareholders", Journal of Economic Perspectives, Vol. 3, pp. 129-140, 1989.
48 A. Hovakimian, T. Opler, S. Titman, "The Debt-Equity Choice", Journal of Financial and Quantitative Analysis, Vol. 36, pp. 1-24. 2001.   DOI
49 H. Oh, "A Study on the Effect of Fair Value Hierarchy upon Cost of Capital Through the Convergence of Market Risk Management and Audit Quality", Journal of the Korea Convergence Society, Vol. 6, No. 5, pp. 1-8, 2015.   DOI
50 L. S. Bagwell, "Share Repurchase and Takeover Deterrence", Journal of Economics, Vol. 22, pp. 72-88, 1991.