The Effects Of Open-market Share Repurchase On Management Earnings Forecast

Open market share repurchase is a behavior by which a company uses its own funds or borrowing money to purchase its own shares in the secondary market,it is widely used compared to dividends or other forms of share repurchase because it has a stronger for flexibility.In the early days,the share repurchase cases in China’s market were mostly based on agreement repurchase,and the overall number was relatively small.However,with the development of China’s securities market,the cases of open market stock repurchase increased year by year in the A-share market.In the bear market of 2012,some enterprises with good business conditions noticed the open market shares repurchase and began to use it as a means to support the stock price.As an opportunity,the open market share repurchase began a burst of explosive growth.From 4 cases in 2011 to 10 cases in 2012,in the following years,the number of cases of open market share repurchase increased year by year,21 cases in 2013,10 cases in 2014,26 cases in 2015,and 19 cases in 2016.In 2017,the number was 32.In September 2018,the CSRC and relevant departments studied and drafted the draft of the "Amendment of the Company Law of the People’s Republic of China" and proposed to amend the relevant provisions on share repurchase,including increasing the share repurchase situation,improving the implementation of the share repurchase decision-making process,and establishing the treasury stock system,etc.,to provide a more sufficient legal basis for the share repurchase of listed companies.It is foreseeable that in the future,the share repurchases,importance will be further enhanced.However,contrary to the continuous emergence of share repurchase in practice,due to the availability of data,the theoretical research on share repurchase in domestic academic circles is still insufficient.There is still a lack of adequate understanding especially about the practice of share repurchase would how to affects the corporate governance.By combing the existing research,we find that the quality of information disclosure is an important reference to reflect the corporate governance.Therefore,this paper studies the impact of open market share repurchase on the quality of information disclosure,and explores what kind of the role that open market share repurchase can play in corporate governance.In foreign countries,the act of managers actively disclosing information to the market is called management earnings forecast,which is often used by foreign managers as a means of transmitting signals and mitigating information asymmetry.The performance forecast system corresponding to it in China is a semi-forced semi-voluntary system,domestic management earnings forecast is also one of the most important information disclosure systems to reduce information asymmetry between Chinese managers and investors.Since 1998,China’s securities regulatory authorities enforced a management earnings forecast system.As of 2008,the domestic management earnings forecast system stipulates that listed companies need to make advance notices in the form of temporary announcements when they lose money,turn losses,or make significant changes in their performance.Studies have found that robust and perfect management earnings forecasts can effectively improve the quality of reports issued by analysts(Bai Xiaoyu,2009;Wang Yutao et al.,2012),which shows that as a way of information disclosure,management earnings forecasts can complete the delivery of information well,and alleviate the task of information asymmetry between managers and investors.Therefore,this article chooses management earnings forecast as an agent for information disclosure.The principal-agent theory holds that information asymmetry and contract incompleteness make managers have sufficient motivation to obtain private income through self-interested behavior,at the expense of harming shareholders’ interests.The loss caused by the self-interested behavior of the manager to the shareholders’interests constitutes the agency cost faced by the enterprise.Agency costs are closely related to the quality of corporate information disclosure:on the one hand,perfect information disclosure increases the possibility of exposure of managers’self-interested behaviors,which helps to reduce the agency costs caused by managers’ self-interested behaviors.Being able to enjoy the private benefits of managers accompanying agency costs will cover up their self-interest by reducing the transparency of corporate information disclosure(Luo et al.,2010;Zhou Donghua et al.,2013;Yuan Zhenchao et al.,2014).For the latter,agency costs have become an important factor affecting the quality of corporate information disclosure.It has been proven that share repurchase,as an important form of profit distribution for listed companies,can effectively reduce agency costs by reducing the free cash flow of companies(Stephens et al.,1998;Yook et al.,2010).In this case,could the share repurchase affect the quality of corporate information disclosure?The existing research did not give a clear answer to this question.This article attempts to answer the above questions.Specifically,this article takes the principal-agent theory as the link,to link the enterprise share repurchase with the management earnings forecast,and deeply analyzes the influence degree,economic mechanism and boundary conditions of the enterprise share repurchase decision on the quality of the management earnings forecast,which not only helps the academic community and investors better understand the economic consequences of the practice trend of share repurchase,and provides useful supplements for the theoretical research on the determinants of the quality of corporate information disclosure.This paper uses the 2012-2017 A-share market to report the annual management earnings forecast as a research sample,using the ologit model and the mixed OLS model for regression,and measuring the management earnings forecast’s quality from the two dimensions of accuracy and deviation from the true earnings,not only tested how the open market shares repurchase to impact on the quality of management earnings forecast,but also tested the managerial stock holdings’ effects on this relationship.The study found:First,in general,open market share repurchase has a positive impact on the quality of performance forecasts.On the one hand,it can make the management earnings forecast more accurate.On the other hand,it can reduce the deviation between the forecast value and the real value.This is because the open market share repurchase reduces the freedom of enterprise retention.Cash flow reduces the incentives for managers to conduct self-interested behaviors,thus improving the quality of management earnings forecasts.From this perspective,this paper believes that open market share repurchases have positive effects on reducing agency costs and improving corporate governance environment.Second,the interaction between management shareholding and open market share repurchase has a negative impact on the quality of management earnings forecast.This is because managerial stock holdings can play a role in reducing agency costs,but the open market share repurchase activity is a good self-interest opportunity for insiders who hold stocks.Insiders can use their own information to increase their holdings before repurchasing,or to reduce their holdings in repurchase.Obtaining benefits,and the degree of domestic penalties for insiders’ arbitrage transactions is obviously insufficient;this paper argues that this shows that the open market share repurchase is not perfect in terms of system design and supervision level in China,so it cannot effectively prevent the phenomenon of internal loopholes in stock holdings.