Incentives for on-market buy-backs: Evidence from a transparent buy-back regime

In the US, open-market repurchases have a non-standard structure, lack formal procedures and there is low degree of transparency. Hence, in order to fully capture the signalling incentives of buy-backs in more general context, we examine the Australian environment where there a distinct announcement of, substantial information release during, as well as a transparent process throughout, the buy-back event. Our study finds strong incentives for on-market buy-backs related to: (i) signalling of undervaluation, (ii) signalling to reduce agency costs and/or information asymmetry, as well as (iii) a means to utilise excess debt capacity. Our most significant result is that signalling incentives, in the context of the more transparent Australian buy-back environment, are substantially greater relative to comparable existing US evidence. Accordingly, changing the US repurchase requirements to a format similar to that which now exists in Australia would encourage the release of more timely, relevant information and so improve the signalling incentives for, and consequently the power of, the US repurchase mechanism.