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Comments on “Legal Institutions, Ownership Concentration, and Stock Repurchases around the World: Signal Mimicking?”
Available online at www.sciencedirect.com
ScienceDirect The International Journal of Accounting 48 (2013) 459 – 460
Discussion
Comments on “Legal Institutions, Ownership Concentration, and Stock Repurchases around the World: Signal Mimicking?” Gary Biddle University of Hong Kong, Hong Kong Received 11 February 2013
I very much appreciate this opportunity to comment on “Legal institutions, ownership concentration, and stock repurchases around the world: Signal mimicking?” presented at the International Journal of Accounting Conference in July 2012. At the conference, I provided suggestions, and I commend the authors for their thorough and thoughtful revision that reflects them. As such, I can be brief, with these comments focusing on their findings, contributions, and avenues for future related research. In its title and focus, the study highlights signal mimicking. In this regard, it addresses a fundamental feature of the signaling framework elucidated by Spence (1973; 2002) — namely, opportunities to falsely signal higher quality for gain. Despite the intuitive nature of mimicking behaviors, little evidence exists to date documenting their occurrence. This study argues that stock repurchases offer a setting conducive to the documentation of signal mimicking, nicely juxtaposed with prior arguments that stock repurchases are employed by managers to signal their undervaluation and enhanced future prospects, and with cross-country data providing opportunities to discern the effects of legal, ownership, and financial reporting characteristics on signal mimicking. The three stated hypotheses test for cross-country conditioning effects on signal mimicking. Specifically, Hypothesis 1 posits that mimicking stock repurchases are more likely to occur in countries with weaker investor protections, ceteris paribus. Hypotheses 2 and 3, also presented in alternate forms, propose that mimicking stock repurchases are more likely to occur in firms with higher ownership concentration, and should be mitigated in countries with stronger investor protections, ceteris paribus, respectively. E-mail address: [email protected]. 0020-7063/$ - see front matter © 2013 University of Illinois. All rights reserved. http://dx.doi.org/10.1016/j.intacc.2013.10.003
460
Discussion
The empirical results are consistent with these hypotheses. Based on country measures standard in the literature, they indicate that stock repurchase mimicking behavior is more likely in countries with weak investor protections and higher ownership concentration, with the latter mitigated in countries with stronger investor protections. These results extend our understanding of how legal and ownership protection characteristics of countries influence stock repurchase signal mimicking, to be sure. But this study contributes more than is apparent from these hypotheses and tests. Behind them is a research design that extends the extant literature in two other important ways that should be noted, and that are not evident in its hypotheses. One is this study's evidence that managers use stock repurchases as mimicking signals. The second is evidence that the adoption of International Financial Reporting Standards (IFRS) also helps mitigate stock repurchase signal mimicking. As the study nicely summarizes, prior studies of stock repurchases have proposed a number of motives, including to adjust leverage, provide shares for stock option plans, distribute free cash flows tax efficiently, manage earnings-per-share, to defend against takeovers, and to signal undervaluation. That U.S. firms have distributed more cash via share repurchases than dividends since 1999 suggests that more than one motive applies. Notwithstanding the interesting research question of which motive(s) apply across firms and countries, if one assumes simply that stock repurchases are generally undertaken to convey positive versus negative inferences for firm valuation, this study provides evidence of a relation fundamental to signaling theory. By estimating a model to predict mimicking stock repurchases, by controlling for growth as suggested, and by testing whether this behavior is mitigated by legal, ownership, and financial reporting conditions across countries, this study's evidence lends support to stock repurchases being used as mimicking signals by managers. In so doing, this study contributes to research literatures on both the motives for stock repurchases and on signaling, where mimicking has been previously modeled but for which empirical evidence has been limited to date, particularly in financial reporting contexts. Recent studies of the effects of IFRS adoptions across countries have provided evidence of enhanced value relevance, comparability, and capital investment efficiency to name a few. This study's findings add to this list evidence that IFRS adoptions also help mitigate signal mimicking by managers using stock repurchases. In this regard, it also contributes to research on corporate governance and mechanisms that enhance it. Clearly this study also opens avenues for future research. As observed, there remain opportunities to document more completely the motives for stock repurchases, with crosscountry data offering design advantages in documenting their applicability. Cross-country comparisons can be further augmented using within-country data and comparisons to confirm cross-country inferences. A related opportunity is to examine how and why stock repurchases relate to concurrent dividend policies in achieving firm (management/board/shareholder) objectives across and within countries, and what these objectives might be. Armed with evidence that managers employ stock repurchases for signal mimicking, future studies can similarly examine other opportunities for signal mimicking and their mitigating factors.
ScienceDirect The International Journal of Accounting 48 (2013) 459 – 460
Discussion
Comments on “Legal Institutions, Ownership Concentration, and Stock Repurchases around the World: Signal Mimicking?” Gary Biddle University of Hong Kong, Hong Kong Received 11 February 2013
I very much appreciate this opportunity to comment on “Legal institutions, ownership concentration, and stock repurchases around the world: Signal mimicking?” presented at the International Journal of Accounting Conference in July 2012. At the conference, I provided suggestions, and I commend the authors for their thorough and thoughtful revision that reflects them. As such, I can be brief, with these comments focusing on their findings, contributions, and avenues for future related research. In its title and focus, the study highlights signal mimicking. In this regard, it addresses a fundamental feature of the signaling framework elucidated by Spence (1973; 2002) — namely, opportunities to falsely signal higher quality for gain. Despite the intuitive nature of mimicking behaviors, little evidence exists to date documenting their occurrence. This study argues that stock repurchases offer a setting conducive to the documentation of signal mimicking, nicely juxtaposed with prior arguments that stock repurchases are employed by managers to signal their undervaluation and enhanced future prospects, and with cross-country data providing opportunities to discern the effects of legal, ownership, and financial reporting characteristics on signal mimicking. The three stated hypotheses test for cross-country conditioning effects on signal mimicking. Specifically, Hypothesis 1 posits that mimicking stock repurchases are more likely to occur in countries with weaker investor protections, ceteris paribus. Hypotheses 2 and 3, also presented in alternate forms, propose that mimicking stock repurchases are more likely to occur in firms with higher ownership concentration, and should be mitigated in countries with stronger investor protections, ceteris paribus, respectively. E-mail address: [email protected]. 0020-7063/$ - see front matter © 2013 University of Illinois. All rights reserved. http://dx.doi.org/10.1016/j.intacc.2013.10.003
460
Discussion
The empirical results are consistent with these hypotheses. Based on country measures standard in the literature, they indicate that stock repurchase mimicking behavior is more likely in countries with weak investor protections and higher ownership concentration, with the latter mitigated in countries with stronger investor protections. These results extend our understanding of how legal and ownership protection characteristics of countries influence stock repurchase signal mimicking, to be sure. But this study contributes more than is apparent from these hypotheses and tests. Behind them is a research design that extends the extant literature in two other important ways that should be noted, and that are not evident in its hypotheses. One is this study's evidence that managers use stock repurchases as mimicking signals. The second is evidence that the adoption of International Financial Reporting Standards (IFRS) also helps mitigate stock repurchase signal mimicking. As the study nicely summarizes, prior studies of stock repurchases have proposed a number of motives, including to adjust leverage, provide shares for stock option plans, distribute free cash flows tax efficiently, manage earnings-per-share, to defend against takeovers, and to signal undervaluation. That U.S. firms have distributed more cash via share repurchases than dividends since 1999 suggests that more than one motive applies. Notwithstanding the interesting research question of which motive(s) apply across firms and countries, if one assumes simply that stock repurchases are generally undertaken to convey positive versus negative inferences for firm valuation, this study provides evidence of a relation fundamental to signaling theory. By estimating a model to predict mimicking stock repurchases, by controlling for growth as suggested, and by testing whether this behavior is mitigated by legal, ownership, and financial reporting conditions across countries, this study's evidence lends support to stock repurchases being used as mimicking signals by managers. In so doing, this study contributes to research literatures on both the motives for stock repurchases and on signaling, where mimicking has been previously modeled but for which empirical evidence has been limited to date, particularly in financial reporting contexts. Recent studies of the effects of IFRS adoptions across countries have provided evidence of enhanced value relevance, comparability, and capital investment efficiency to name a few. This study's findings add to this list evidence that IFRS adoptions also help mitigate signal mimicking by managers using stock repurchases. In this regard, it also contributes to research on corporate governance and mechanisms that enhance it. Clearly this study also opens avenues for future research. As observed, there remain opportunities to document more completely the motives for stock repurchases, with crosscountry data offering design advantages in documenting their applicability. Cross-country comparisons can be further augmented using within-country data and comparisons to confirm cross-country inferences. A related opportunity is to examine how and why stock repurchases relate to concurrent dividend policies in achieving firm (management/board/shareholder) objectives across and within countries, and what these objectives might be. Armed with evidence that managers employ stock repurchases for signal mimicking, future studies can similarly examine other opportunities for signal mimicking and their mitigating factors.