Corporate Share Buybacks: Impact on Equity Incentive Pay and Shareholder Value

This book examines the paradox of the popularity of on-market stock buyback activities in a market environment characterized by high share prices. It integrates elements from agency theory and signalling theory and draws upon recent changes in the Australian payout policy and incentives pay for risk-averse employees. The authors utilize a dynamic model to rationalize this paradox, which is divided into three components. The first component predicts that executives may conduct on-market stock buyback programs to adjust equity-based remuneration for risk-averse employees, the second component predicts that companies may invest in SBPs to increase the ownership stakes of employees, and the third component predicts that shareholders would benefit from incentives-induced buybacks if the opportunity cost of funds spent on buybacks is less than its inverse price-to-earnings ratio. The findings highlight differences in the market responses towards announced repurchase motives, implying that not all incentives-induced buybacks are value-destructive.

Format: Hardback
Length: 208 pages
Publication date: 05 December 2023
Publisher: Taylor & Francis Ltd

This comprehensive book delves into the intricate interplay between agency theory and signalling theory, drawing upon recent developments in the Australian payout policy and incentives pay for risk-averse employees to offer theoretical and empirical analyses that shed light on the paradoxical popularity of on-market stock buyback activities in a market environment characterized by relatively high share prices. The authors employ a dynamic model that rationalizes this paradox, which is structured into three distinct components. The first component predicts that executives may engage in on-market stock buyback programs (SBPs) to adjust equity-based remuneration for risk-averse employees, thereby motivating their performance without the need for additional costly equity incentive plans (EIPs). The second component suggests that companies may invest in SBPs to enhance employee ownership stakes, thereby encouraging risk-averse employees to increase their productivity, ultimately benefiting the firm's value. The third component predicts that shareholders would reap benefits from incentives-induced buybacks if the opportunity cost of funds spent on buybacks is less than the inverse price-to-earnings ratio.

The authors' findings highlight significant variations in market responses to announced repurchase motives, indicating that not all incentives-induced buybacks are value-destructive. Specifically, the widespread assumption that SBPs hinder investments in human and capital stock may be subjective, as the findings reveal that incentives-induced buybacks can be value-creative or value-destructive, depending on the share repurchase motives of SBPs.

This book serves as a valuable resource for scholars and researchers in the fields of finance, corporate finance, financial economics, and financial accounting. It provides a comprehensive examination of the factors driving on-market stock buyback activities and offers insightful perspectives on their economic implications. By integrating agency theory and signalling theory, this book contributes to the ongoing dialogue on corporate governance and shareholder value maximization.

Weight: 580g
Dimension: 234 x 156 (mm)
ISBN-13: 9781032131146