Share Repurchases and Board Independence

Abstract

Share repurchases have come under criticism as they may be used for earnings management and take capital away from productive investment. However, share repurchases can also reduce the agency costs of free cash flow and offset the dilution of current shareholders. Whether firms engage in “good” or “manipulative” share repurchases can depend on the quality of corporate governance. Using panel data from the UK, this chapter shows that board independence increases the propensity of firms to engage in share repurchases. Moreover, board independence attenuates the harmful effect of manipulative share repurchases on employment growth. The chapter’s empirical approach exploits the passage of a corporate governance reform, which helps to tease out the direction of causality. The chapter’s findings advocate in favor of more active involvement of independent directors in payout policies.