Controlling Shareholders’ Opportunistic Use of Share Repurchases

This study examines how share repurchase and dividend policies are influenced by controlling shareholders in an emerging market. We argue that controlling shareholders can utilize share repurchase opportunistically, particularly when they exercise voting rights in excess of cash-flow rights. The evidence of Korean firms suggests that the wedge between the voting rights and cash-flow rights positively affect share repurchases but adversely affect cash dividends. We also find that share repurchases are used as a means of false signal when cash flows from operations are poor, whereas cash dividends are positively related to cash flows from operations. Furthermore, we document that share repurchases do not substitute for cash dividends. Overall, our results indicate that controlling shareholders of Korean firms use share repurchases as a temporary opportunism.