ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Relation between Acquisition of Treasury Stock and Earnings Management, Dividends

  • YunSung Koh Hankuk University of Foreign Studies College of Global Business

Asian Tax Journal Vol. 15 No. 3 (2014), pp. 175-207

Abstract

This study examines how the way of open market share repurchase affects the earnings managementand the dividend. It is well known for corporate to announce open market share repurchase for solvinginformation asymmetry situation then investors react due to the signal. This process settles informationasymmetry of the firm, so its stock price rises. Besides open market share repurchase influencesshare holder’s capital gain. It can act a role of payout policy like dividend. In Korea, there are two way of open market share repurchase. The one is called direct way(tobuy company’s own stock at the market) and the other is indirect way(to make a contract withinvestment institutions as trust that is composed of its own stock). The two methods have somedifferences in disclosure, assessment about actual repurchasing behavior, and disposal. The directway generally gets higher signaling effect and strict regulation. So it is possible for companiesthat have different accounting features to make different decisions about open market repurchases. Furthermore, managers can affect this process. Prevalent share repurchase can help companies stabilize their stock price, but at that time of itsdisclosure, there is also little information that investors can use to find out undervaluation. Somanagers are able to have opportunistic idea. As many studies examined open market sharerepurchase were concentrated in the decision factors, there is few researches on its methods. Sowe examine how the earnings management and dividend payout policy can affects companies’choice of share repurchase for explaining whether manager’s intervention has an effect on thedecision making process in choosing the way of repurchasing its share. There were some differences between the companies which choose different methods. The higherlevel of earnings management was found in the group of trust holding companies, also the lessdividend. Direct purchasing companies features like R&D expense, market value, ROA, the rate offoreign share holder, and the size tower above trust holding companies. When sending a falsesignal to the market, managers likely choose the indirect way of share repurchase. Both of shareopen market share repurchase and the dividend can contribute well to share holders’ wealth.

Keywords

  • share repurchase
  • earnings management
  • dividend
  • opportunistic behavior

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