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

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