Comparing Share Buybacks in Highly Regulated and Less Regulated Market Environments

Abstract

Do changes in the legal and regulatory environment of a country affect companies' financing/investment decisions? In this paper, we address this question by examining the market's reaction to announcements of share buybacks in Australia. Before 1989, Australian companies were prohibited from repurchasing their shares and, until 1995, they were heavily regulated with few companies repurchasing their shares. In December 1995, the regulations governing share buybacks were simplified making it considerably easier for companies to repurchase their shares. The changing Australian legal regulation of share repurchases provides a unique opportunity to test the effects of legal regulation on companies' financing/investment decisions. We find that, unlike in the United States, the market reacts most positively to on-market buybacks (equivalent to open-market repurchases), while the reaction to other types of share buybacks is positive but not statistically significant. We also find that the abnormal returns earned by resource sector companies announcing share buybacks are higher than the abnormal returns earned by share buybacks announced by companies in the industrial and financial services sectors. An examination of matched companies announcing share buybacks before and after the regulatory changes in December 1995 shows that the market attaches a substantially higher value to the removal of stringent regulations governing share buybacks. This evidence is consistent with the expectation that the stringent regulation of share buybacks during 1989-1995 made them less effective as a credible signaling mechanism.