The effect of corporate governance on stock repurchases: evidence from Sweden

Abstract

Research Question/Issue: The paper examines whether corporate governance differences affect firms' stock repurchasing behaviour. Previous hypotheses on stock repurchases, well-supported by US data, are based on assumptions of managerial autonomy that might not be descriptive in corporate governance systems characterised by influential controlling shareholders such as the Swedish. Firm-level corporate governance arrangements may also affect firms' incentives to repurchase stock. Research Findings/Insights: Stock-repurchasing patterns among Swedish firms differ from those previously observed among US firms. The findings indicate that Swedish firms do not repurchase stock to distribute excess cash, signal undervaluation or fend off takeovers. Stock repurchases are made in addition to dividends and thus do not substitute for them. Firm-level corporate governance arrangements directly affect stock repurchasing behaviour. Firms without a dominant controlling owner seem to use stock repurchases to increase leverage. The existence of a dominant controlling shareholder diminishes the propensity for stock repurchases, while cross listing on a US or UK stock market increases that propensity. Theoretical/Academic Implications: The findings suggest that corporate governance differences affect stock repurchasing behaviour. The agency-theoretical view of the firm, on which the leading hypotheses on stock repurchases are based, accurately predicts stock repurchases only in certain institutional and governance settings. Practitioner/Policy Implications: The study suggests that differences in national and firm-level corporate governance must be taken into account in order to accurately assess outcomes of regulatory reforms and/or harmonisation attempts.