Open AccessMeasuring the agency costs of dispersed ownership: the case of repurchase initiations
Author(s) -
Ruth Gesser,
Rony Moche Halman,
Oded Sarig
Publication year - 2014
Publication title -
corporate ownership and control
Language(s) - English
Resource type - Journals
eISSN - 1810-0368
pISSN - 1727-9232
DOI - 10.22495/cocv11i3p2
Subject(s) - share repurchase , agency cost , business , dividend , monetary economics , commit , principal–agent problem , yield (engineering) , equity (law) , context (archaeology) , agency (philosophy) , finance , economics , corporate governance , shareholder , paleontology , philosophy , materials science , epistemology , database , biology , computer science , political science , metallurgy , law
Empirical investigations of the agency costs of dispersed ownership yield mixed results. A possible explanation for the lack of conclusive evidence is inaccurate measurement of the extent of the problem. We suggest that the extent of the problem be measured as theory suggests: by the wealth that managers commit to their firms. We examine the relative performance of different measures of the agency problem of dispersed ownership in the context of changes in payout policy affected by repurchase initiations. We find that the suggested measure – managerial equity wealth – can explain better than any other measure the market reaction to repurchase initiations. We also find that market reaction to repurchase initiation is smaller for firms with high media coverage than for firms with low media coverage and that repurchases that follow a large rise in stock prices elicit relatively small market reactions. Lastly, we find that market reaction to repurchase announcements decreases with the dividend yield of the firm, which suggests that share repurchases are relatively less important when dividends are used to alleviate the problems of free cash flows. Our results are robust to several modifications of the main test.