TITLE

Corporate governance and the market reaction to stock repurchase announcement

AUTHOR(S)
Chahine, Salim; Zeidan, Mohamad; Dairy, Hala
PUB. DATE
November 2012
SOURCE
Journal of Management & Governance;Nov2012, Vol. 16 Issue 4, p707
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
This paper investigates the effect of corporate governance on market reaction around of a stock repurchase announcement. We argue that corporate governance affects the ability of a stock repurchase to alleviate agency costs related to free cash flows, and the credibility of the undervaluation signal sent by the announcement of buyback programs. We find a higher 3-day cumulative abnormal return to programs announced by firms with better corporate governance practices than those with bad governance (1.6% and 0.85% respectively), and the market reaction is significantly higher following the successive scandals in year 2001 (Enron, Arthur Anderson, WorldCom...) and the resulting Sarbanes-Oxley Act of 2002. Further investigations indicate that firms with a lower Free Cash Flow to Asset ratio have a higher market reaction, which is consistent with the information signaling hypothesis, and this is more significant in firms with good governance practices, and following post Sarbanes-Oxley Act.
ACCESSION #
82213906

 

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