Does Minority Shareholder Protection Matter? Evidence from Open-Market Share Repurchases

Asia-Pacific Journal of Accounting & Economics, Forthcoming

35 Pages Posted: 19 Oct 2015

See all articles by Ruei-Shian Wu

Ruei-Shian Wu

Yuan Ze University

Chuan-San Wang

National Taiwan University - The Department and Graduate Institute of Accounting

Date Written: June 27, 2015

Abstract

This study examines the impact of minority shareholder protection on the signaling effect of open-market share repurchases, the post-repurchase operating performance, and the subsequent investment decisions. When controlling owners retain tight control of their firms by insufficient equity investment, the discrepancy between voting rights and cash flow rights induces an entrenchment problem and undermines minority shareholder protection. This study finds that the market reaction to share repurchase announcements is contingent on minority shareholder protection. The signaling effect of repurchase announcements is weak for firms subjected to poor minority shareholder protection, especially for the repurchase purposes of converting debt to equity and signaling undervaluation. Moreover, the results show that poor minority shareholder protection is negatively associated with the long-term operating performance following repurchase announcements. We also find that repurchasing firms with poor minority shareholder protection experience notably declines in R&D expenses, cash holdings, and inventory when they repurchase shares to convey undervaluation.

Keywords: Minority shareholder protection, share repurchase, signaling effect, operating performance, post-repurchase investment

JEL Classification: G32, G34, G35

Suggested Citation

Wu, Ruei-Shian and Wang, Chuan-San, Does Minority Shareholder Protection Matter? Evidence from Open-Market Share Repurchases (June 27, 2015). Asia-Pacific Journal of Accounting & Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2675730

Ruei-Shian Wu

Yuan Ze University ( email )

135 Yuan-Tung Road
Chung-Li, 32003
Taiwan
886-3-4638800#2195 (Phone)
886-3-4633845 (Fax)

Chuan-San Wang (Contact Author)

National Taiwan University - The Department and Graduate Institute of Accounting ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan
+886-2-33669782 (Phone)
+886-2-23638038 (Fax)

HOME PAGE: http://exp.management.ntu.edu.tw/zh-TW/Acc/teachers/147

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