Independent Directors and Share Repurchases

ABSTRACT:

Mario Amore, Bocconi University and Anna Grosman, Loughborough University

"Share repurchases have come under criticism as they may be used for earnings management and taking away excess capital from productive investment and innovation growth. However, share repurchases can be justified when there is lack of profitable investment opportunities, when company’s shares are undervalued, or to offset dilution of current shareholders. Whether companies engage in “good” or “bad” share repurchases can crucially depend on the quality of corporate governance. Our paper investigates the effect of independent directors on repurchase policies. We use a panel dataset of UK firms from 1999 to 2012 and an identification strategy based on a corporate governance reform in the UK in 2003. We find that more board independence has a positive effect on the propensity to engage in share repurchases, while at the same time having no negative effects on real outcomes, such as R&D, employee and sales growth, and having a positive effect on asset growth. We conclude that greater board independence increases share repurchases without harming firm’s innovation and growth."