The Relationships among Share Repurchases, Employee Stock Ownership Plan and Real Investment Expenditure in Taiwan: An Empirical Study

Taiwan's Employee Stock Ownership Plan (ESOP) slightly differs from that in developed countries because the employees of high-tech firms in Taiwan do not need to pay to receive stock as a bonus. This situation causes indirect losses to original stockholders. This work investigates how ESOP, share repurchases and real investment in Taiwan are related Empirical findings support the signaling effect of share repurchases. Additionally, share repurchase does not significantly affect long-term investment expenditure, but is significantly negatively related to short-term investment, capital and RD this was the leading ECP used by high-tech firms in Taiwan before 2001. However, Taiwan's ESOP differs from that in the U.S. as employees in Taiwan's high-tech firms do not pay to receive the shares of the firm as a stock bonus. The ESOP in Taiwan also includes the benefits afforded to highly compensated executives unless they voluntarily give up this opportunity. After the Repurchase Stock Act was implemented in Taiwan in 2000, Taiwanese firms began to utilize repurchase stock to motivate employees by enabling them to share in profit, according to a target related to stock repurchases. This study attempts to achieve the following: (1) investigate the market's reaction to an announcement to repurchase by publicly listed company; (2) elucidate the impact of the exercise of ESOP on a manager's decision to repurchase shares; and (3) determine whether the repurchasing of shares significantly affect the real investment expenditure of a firm that implements an ECP in Taiwan. Literature Review This study categorizes pertinent literature into two areas: First, articles on the motivation for repurchasing stock, the announcement effect of share repurchases and the effect of shifting resources away from investment and RD (2) to boost the value of its stock to signal undervaluation; (3) to defend against unwanted takeover attempts [as in Vermaelen (1981), Bagwell (1991)]. Studies of the association between share repurchases and R&D and real investment expenditure are summarized as follows. Bens et al. (2002) determined that a company's repurchasing of shares was positively related to the implementation of an ESOP. They also found that firms most often shifted resources away from real investment expenditure to repurchase stock. The second part of the literature is about the definition, strengths and weaknesses of ESOP. The ESOP Association (1997) proposed that an ESOP was a defined contribution plan, which does not have a fixed schedule of benefits guaranteed to employees. Instead, the sponsoring company makes a specific or discretionary contribution to the plan every year. This work further classifies empirical findings regarding ESOP into evidence that supports and evidence that does not support ESOP. Beatty (1995), Park and Song (1995), and Oakeshott (2000) found positive effects of ESOP on the overall performance of the company. Nevertheless, ESOP plans may not be a panacea for everyone. For example, Livingston and Henry (1980), Brooks et al. (1982), Gordon and Pound (1990), Scholes and Wolfson (1990), and Kurland (1997) all claimed that ESOPs had little positive effects on the productivity, profitability or the stock price of sponsoring companies. …