The Effect of Corporate Governance on Stock Repurchases: Evidence from Sweden

• Author: Andreas Jansson,Ulf Larsson‐Olaison
• Date: 01 September 2010
• Published date: 01 September 2010
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00803.x

The Effect of Corporate Governance on Stock

Repurchases: Evidence from Swedencorg_803457..472

Andreas Jansson* and Ulf Larsson-Olaison

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: The paper examines whether corporate governance differences affect f‌irms’ stock repurchasing

behavior. 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 characterized by inf‌luential controlling share-

holders 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 governancearrangements directly affect stock repurchasing behavior. 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

behavior. 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 harmonization attempts.

Keywords: Corporate Governance, Stock Repurchases, Sweden, Dividends

INTRODUCTION

This paper examines the issue of whether corporate gov-

ernance differences affect f‌irms’ stock repurchasing

behavior. The paper tests whether f‌ive well-established

hypotheses can explain stock repurchases among Swedish

f‌irms. These hypotheses are grounded in agency-theoretical

reasoning and have often been found to explain stock repur-

chases in the US context. The issue at stake here is whether

they can be generalized to a context with substantially dif-

ferent corporate governance arrangements – the Swedish.

The paper also explores the impact of a set of f‌irm-level

corporate governance variables on stock repurchases. The

results suggest that the hypotheses grounded in agency

theory are unf‌it for explaining stock repurchases among

Swedish f‌irms, which is likely to be an effect of differences in

corporate governance arrangements between Swedish and

US f‌irms. The paper identif‌ies controlling shareholder

salience and heightened exposure to Anglo-Saxon capital

markets as important factors shaping stock-repurchasing

behavior among Swedish f‌irms.

Previous research has hypothesized that stock repur-

chases constitute a way of distributing temporary excess

cash (Fenn & Liang, 2001; Guay & Harford, 2000; Jagan-

nathan, Stephens, & Weisbach, 2000). It has also been sug-

gested that stock repurchases are a substitute for dividends

(Dittmar, 2000; Grullon & Michaely, 2002; Skinner, 2008).

Moreover, various forms of the signalling hypothesis

suggest that the motivation behind stock repurchases maybe

that managementwishes to signal perceived unfair low valu-

ation of the f‌irm’s stock (Chang & Sullivan, 2007; Dittmar,

2000; Ikenberry, Lakonishok, & Vermaelen, 1995; Jun, Jung,

& Walkling, 2009; Lakonishok & Vermaelen, 1990; Louis &

White, 2007; Sanders & Carpenter, 2003; Vermaelen, 1981).

Furthermore, it has been hypothesized that the underlying

motive behind stock repurchases may sometimes lie in an

*Address for correspondence: Andreas Jansson, School of Business and Economics,

Linnaeus University,S-351 95 Växjö, Sweden. Tel: +46 470708 230; Fax: +46 470824 78;

E-mail: andreas.jansson@lnu.se

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Corporate Governance: An International Review, 2010, 18(5): 457–472

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00803.x

attempt by managementto fend off take-overs (Billett & Xue,

2007; Chang & Sullivan, 2007; Denis, 1990; Dittmar, 2000;

Vermaelen, 1984). Yet another hypothesis on the motives

behind stock repurchases is that f‌irms may repurchase stock

to increase leverage (by decreasing outstanding equity)

towards an optimal level that minimizes agency and f‌inanc-

ing costs (Dittmar, 2000; Ofer & Thakor, 1987; Wansley,

Lane, & Sarkar, 1989).

These hypotheses are not necessarily mutually exclusive

and have all gained substantial empirical support when

tested with US data. They have, however, been developed to

explain the behavior of US f‌irms, operating in a corporate

governance system characterized by a comparatively high

degree of ownership dispersion, managerial autonomy, and

fraction of compensation that is performance-based (Geda-

jlovic & Shapiro, 1998; Weimer & Pape,1999). These assump-

tions of managerial autonomy and motivations can be

associated more generally with an agency-theoretical view

of the f‌irm. This view has received criticism for being

US-centric, failing to take into account the effects that

embeddedness of corporations in varying institutional con-

texts have on corporate actions (Aguilera & Jackson, 2003;

Fligstein & Freeland, 1995; Gospel & Pendleton, 2005; Lubat-

kin, Lane, Collin, & Very, 2005; O’Sullivan, 2002). The perti-

nent agency problem in a corporate governance system, for

example, is likely to vary with the relative strength of inter-

nal and external governance mechanisms (Dharwadkar,

George, & Brandes, 2000).

Swedish corporate governance, like most corporate gov-

ernance systems throughout the world (La Porta, Lopez-De-

Silanes, & Shleifer, 1999), is characterized by powerful

controlling shareholders who are actively involved in f‌irms’

governance (Agnblad, Berglöf, Högfeldt, & Svencar, 2001;

Stafsudd, 2009). Swedish controlling shareholders are, for

example, typically involved in board work (Dzialo, Jon-

nergård, Kärreman, Svensson, & Urbanek, 1998; Jonnergård

& Kärreman, 2004; Jonnergård & Larsson, 2007). Moreover,

managerial compensation in Sweden is, compared to US

conditions, to a lesser degree performance-based (Oxelheim,

Wihlborg, & Zhang, 2008; Weimer & Pape, 1999). All this

suggests that Swedish f‌irms in general are characterized by

substantially greater inf‌luence of powerful and active

owners on board-level decisions such as stock repurchases,

and less capital-market pressures on top managers, than US

f‌irms, although there may of course be f‌irm-level variation

on these dimensions in the Swedish context. To the extent

that large owners and managers less incentivized by f‌inan-

cial performance face different incentives from the more

autonomous US managers regarding stock repurchases,

these institutional differences may cause hypotheses on

stock repurchases developed with US f‌irms in mind to hold

less explanatory power in the Swedish context.

This paper tests whether the hypotheses derived from an

agency-theoretical view of the f‌irm, which have received

previous empirical support when tested on US data, can

explain stock repurchases among Swedish f‌irms, to explore

whether the institutional differences in corporate gover-

nance between these two countries may produce dissimilar

patterns of stock repurchases. We furthermore test whether

variation in f‌irm-level corporate governance arrangements

affects stock repurchases, to explore whether Swedish f‌irms

governed more or less similarly to US f‌irms exhibit dissimi-

lar repurchasing patterns. Understanding how variation in

corporate governance affects stock repurchases will argu-

ably constitute one contribution towards a better under-

standing how institutional embeddedness of corporations

impacts the behavior of these corporations.

We f‌ind evidence that partially supports the leverage

hypothesis, but not the other hypotheses. A sub-sample

analysis reveals that the leverage hypothesis predicts stock

repurchases for f‌irms without a large shareholder (>25 per

cent of the votes), but not for other f‌irms. Dividends are,

contrary to expectations, positively related to stock repur-

chases, suggesting that stock repurchases are generally

made in addition to dividends rather than as a substitute for

them. Firms cross-listed in the US or UK are more prone to

stock repurchases, whereas the presence of a large share-

holder is negatively related to stock repurchases. Overall,

this indicates that since board-level decisions such stock

repurchases are likely to be under the control of large share-

holders, and large shareholders are likely to have interests

that are different from those of an autonomousmanagement,

hypotheses formulated within the agency-theoretical frame-

work are generally unf‌it for explaining stock repurchases

among Swedish f‌irms.

The next section describes the historical development and

characteristics of Swedish corporate governance. The section

that follows reviews the literature on stock repurchases and

develops the hypotheses to be tested, followed by a section

detailing the sample and variables used. Thepaper continues

by presenting the test results, followed by a discussion and

conclusion.

THE SWEDISH CORPORATE

GOVERNANCE SYSTEM

As described by Agnblad et al. (2001), corporate governance

in Sweden is characterized by highly concentrated owner-

ship of listed f‌irms. In fact, Swedish listed f‌irms exhibit

among the highest ownership concentrations in the world

when measured as concentration of votes, which is facili-

tated by legal provisions that can be used simultaneously,

such as dual-class shares and pyramid and cross ownership.

These allow concentration of votes without corresponding

ownership of cash f‌low rights. Sweden is also often argued

to have only moderate formal minority protection in inter-

national comparisons (La Porta et al., 1999; Nenova, 2003),

leading to a situation in which minority expropriation and a

small and inactive stock market might be expected. Yet

Sweden has liquid f‌inancial markets (Agnblad et al., 2001;

Stafsudd, 2009) and very little minority shareholder expro-

priation from an international perspective (Gilson, 2006;

Nenova, 2003).

These ratherparadoxical facts are often said to be the effect

of controlling owners that monitor management while

refraining from exploiting minority shareholders for

reasons of social prestige and reputational considerations

(Agnblad et al., 2001; Jansson, 2007; Stafsudd, 2009). The

large controlling shareholders are typically represented on

the board of directors, where they are considered hierarchi-

cally superior by other board members (Kärreman, 1999),

458 CORPORATE GOVERNANCE

Volume 18 Number 5 September 2010 © 2010 Blackwell Publishing Ltd