Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia
Ali C. Akyol(Department of Finance, Faculty of Business and Economics, University of Melbourne)
Chi Chong Foo(Department of Finance, Faculty of Business and Economics, University of Melbourne)

Using repurchase reasons provided by Australian companies for their stock repurchase programs, we ask if the market’s response is different across repurchase motivations by examining actual daily share repurchases. We find that firms with the undervaluation motive experience a more positive stock price reaction when they report their repurchases to the market. We show that undervaluation motive firms repurchase fewer shares and have a lower program completion rate than other motives firms. During the 1-year period following the repurchases, undervaluation motive firms do better than their control sample firms whereas other motive firms do not perform better or worse than their control sample firms. Overall, our results suggest that the undervaluation motive is a stronger signal than other repurchase motives, and contrary to the predictions of the standard signaling theories, management statements carry some value for the market. We also present some evidence suggesting that a costly action may not be needed for a signal to be credible.

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Managerial Overconfidence and Share Repurchases
Pei-Gi Shu(Department of Business Administration, Fu Jen Catholic University)
Yin-Hua Yeh(Graduate Institute of Finance, National Chiao Tung University)
Tsui-Lin Chiang(Graduate Institute of Business Administration, Fu Jen Catholic University)
Jui-Yi Hung(Department of Business Administration, Fu Jen Catholic University)

Following prior studies, we use keywords in press portrayals to gauge managerial overconfidence. We hypothesize that managerial overconfidence is related to a manager’s perception that the firm is undervalued. Results from 2744 share repurchase programs launched by 783 listed firms in Taiwan confirm this hypothesis. We find that managerial overconfidence is positively correlated with the intensity of share repurchasing, which is measured by scale, execution, frequency, and the difference between the announced price and post-execution price. Moreover, the programs launched by overconfident managers were not undervalued and therefore were associated with reduced post-announcement returns.

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Time-Varying Spillover Effects on Sectoral Equity Returns
Hatice Ozer Balli(School of Economics and Finance, Massey University and Department of Economics, Suleyman Sah University)
Faruk Balli(Department of Business Administration, Suleyman Sah University)
Rosmy Jean Louis(Department of Economics and Finance, Faculty of Management, Vancouver Island University)

In this paper, we investigate the integration of the Euro- and US-wide sector equity indices by focusing on the return, volatility, and trend spillover effects of local and global shocks. We explore that unlike volatility spillovers, return spillovers are not significant enough to explain sector equity returns. Moreover, we are able to show that when the trend is incorporated into the volatility spillover analysis, a number of sector equity indices tend to react similarly to local and global shocks. Following this path, we arrive at four major sector groups: production and industry; consumer goods and services; financial; and technology, media, and telecommunication across Euro- and US-wide sector equity indices.

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Two-Factor Decomposition Analysis for Correlation between Mainland China and Hong Kong Stock Markets*
Kent Wang(WISE, Xiamen University)
Li Miao(WISE, Xiamen University)
Jiawei Li(WISE, Xiamen University)

We analyzed the correlation between mainland China and Hong Kong stock markets based on cash flow (CF) news and discount rate (DR) news instead of considering market return as a whole. We decomposed stock return into CF news and DR news following Campbell and Vuolteenaho. Then, the VAR- BEKK-GARCH method was used to investigate the time-varying correlations of CF news and DR news in the two markets. We ensured robustness by using the structural break test from Bai and Perron to estimate the structural break points during the sample period. The results show that CF news and DR news in the mainland China market is more volatile than in the Hong Kong market, and DR news correlation is usually negative when the mainland China market is undergoing some reform. The estimated structural break points were matched to important events in the mainland China market and the two markets become increasingly correlated.

*We wish to thank the Associate editor of IRF, an anonymous referee, Guo Hui, Kai Li, Michael ONeil, Yongmiao Hong, seminar participants in CCER, Peking U, SWUFE, Dalian Commodity Exchange (DCE), and the 2012 SMU ‘Asset Price Bubble’ Summer Institute for helpful comments. Wang wish to acknowledge financial support of NSFC #71101122. This article is an independent research which represents only the authors’ personal views. All remaining errors are our own.

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The Norm Theory of Capital Structure: International Evidence*
Swee-Sum Lam(Department of Finance, National University of Singapore)
Weina Zhang(Department of Finance, National University of Singapore)
Reginald Reagan Chua Lee(United Alliance Capital Pte Ltd., Singapore)

Akerlof proposes that the norms of decision makers can bridge the gap between New Classical economic theories and conflicting empirical evidence. We apply his framework to cross-country capital structure decision making and propose a norm theory of capital structure. Consistent with its predictions, we find that two principal components that represent the manager–subordinate relationship and the manager–environment relationship in a national culture are significantly and negatively related to the median leverage ratio at the country level. This study is among the first to provide a direct link between national culture and capital structure as made operational through managerial norms.

*Lam acknowledges funding support from the Ministry of Education of Singapore (AcRF Tier 1 research grant R-315-000-084–112). The authors would like to thank Sudipto Dasgupta (the editor), an anonymous associate editor, an anonymous referee, Warren Bailey, David Hirshleifer, Vidhan Goyal, three anonymous reviewers, and the discussant and participants in the 2009 Academy of Management Meetings for their helpful comments and suggestions. Any remaining errors are ours.

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