Agency Problems and Stock Repurchases: Evidence from Japan

Min Teng () and Toyohiko Hachiya ()
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Min Teng: Department of Finance, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan, Hubei 430074, China
Toyohiko Hachiya: Graduate School of Commerce and Management, Hitotsubashi University, Japan

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2013, vol. 16, issue 03, 1-30

Abstract: This paper examines stock repurchases from an agency perspective by identifying agency costs across three dimensions — interest conflicts and information asymmetry, managerial discretion, and the use of alternative mechanisms to mitigate agency conflicts. We use ownership structure as a proxy for interest conflicts and information asymmetry, employ cash balance and free cash flow as two measures of managerial discretion, and consider cash dividends and interest-bearing liabilities as alternative vehicles for distributing cash. We find that a monitoring structure motivates managers to mitigate agency costs through stock repurchases. Particularly, monitored firms with higher levels of cash balance prefer cash dividends to stock repurchases, whereas monitored firms with more cash dividends repurchase more shares because of their stronger incentive to mitigate agency costs. However, when firms have a very high level of dividends, they substitute stock repurchases for dividends to avoid a dividend cut in the future.

Keywords: Ownership structure; stock repurchases; agency costs; payout policy (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219091513500161

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