Impact of stock buyback programs on equity incentive pay and shareholder value: Australian evidence
Creators: name: NDAYISABA, Gilbert
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350105
subject: Management accounting
classificationCode: 350203
subject: Financial econometrics

description: This thesis integrates elements from the agency theory and the signaling theory and draws upon recent changes in the Australia payout policy and incentives pay for risk-averse employees, to provide theoretical and empirical analyses that explain the paradox of popularity of on-market stock buyback activities in a market environment characterised by reasonably high share prices. <br><br>
Traditionally, companies conduct stock buybacks (1) to signal to investors that the management perceives the company's share price as undervalued, and thus represents a bargain; (2) to distribute excess funds to shareholders without providing additional cash dividend; (3) to offset the dilution effect that occurs when employee options are exercised; (4) to adjust the company's capital structure when there is a substantially higher proportion of equity than its target capital structure; and (5) to defend against a takeover attempt by (a) driving up the share price and making it more costly for other parties to acquire the company, and (b) concentrating the ownership of company shares in the hands of company management to fend off the hostile takeover. However, the theoretical model developed in this thesis predicts that executives also invest in stock repurchase activities to adjust equity-based compensation for risk-averse employees, thereby motivating their performance to increase firm value without granting them additional costly equity incentive plans. <br><br>
The model is divided into three components. The 1st component of the model al predicts that executives may be conducting on-market stock buyback programs to adjust equity-based remuneration for risk-averse employees, thereby motivating their performance without granting them additional costly equity incentive plans. The 2nd component of the model predicts that companies are likely to invest in stock buyback programs to increase the ownership stakes of employees in the firm, thereby inducing risk-averse employees to increase their labour productivity which increases firm value. The 3rd component of the model predicts that shareholders would benefit from incentives-induced buybacks if a firm's opportunity cost of funds spent on buybacks is less than its inverse price-earnings ratio. The evidence in favour of the predictions of the model is surprisingly robust. Based upon the above predictions, first, this research employs various econometric methods such as TSLS and the maximum likelihood estimators to quantify the net effects of SBPs on the EIPs. As expected, this study finds that all equity incentives pay components for risk-averse employees are positively related to the dollar value spent on buybacks, with the more powerful effect for management incentives pay. However, additional tests performed using Structural Equation Modelling (SEM) approach suggest that executives with stock-based remuneration tied to earning per share performance conditions provide them motives to manipulate per-share earnings through stock repurchases and maximise the value of their incentives pay. At the same time, they can motivate the performance of employees with unvested options. These results infer that incentives-induced buybacks may stifle viable capital investment projects and act as a vessel for 'wealth transferring' among executives, non-executive employees and shareholders. This finding may be perceived as a contrast to the prediction of the developed model that stock buyback programs (SBPs) may serve as an 'incentive tool' to reduce agency problems. According, we perform additional empirical tests to examine how the Australian equity market reacts to incentives-induced buybacks, using SEM and event study methods.  <br><br>
Obtained results related to short- and long-term performance of repurchasing firms indicate that announcing companies that cite the undervaluation motives as their reason for conducting SBPs, outperform their peers in short-run. However, long-term analysis of announcing firms also demonstrates that incentives-induced buybacks may erode firm value when firms are conducting EPS-induced repurchases. These findings highlight differences in the market responses toward announced repurchase motives, implying that not all incentives-induced buybacks are value-destructive buybacks. Specifically, the widespread assumption that stock buyback programs stifle investments in human and capital stock may be partial thinking because the findings show that incentives-induced buybacks may be value-creative or value-destructive depending on share repurchase motives of stock buyback programs.