Ownership structure and open market stock repurchases in France

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Ownership structure and open market stockrepurchases in FranceEdith Ginglinger a & Jean-François L’her ba CEREG , Paris-Dauphine University , Franceb Investment Policy Research , Caisse de dé[pcirc]ot et placement duQuébec , CanadaPublished online: 08 Feb 2011.

To cite this article: Edith Ginglinger & Jean-François L’her (2006) Ownership structure andopen market stock repurchases in France, The European Journal of Finance, 12:1, 77-94, DOI:10.1080/13518470500039543

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The European Journal of FinanceVol. 12, No. 1, 77–94, January 2006

Ownership Structure and Open Market StockRepurchases in France

EDITH GINGLINGER∗ & JEAN-FRANÇOIS L’HER∗∗∗CEREG, Paris-Dauphine University, France, ∗∗Investment Policy Research, Caisse de dépot et placement duQuébec, Canada

ABSTRACT This paper examines open market stock repurchases in France.We find a positive average marketreaction to the repurchase announcement. However, the magnitude of the price reaction is found to dependon a number of corporate governance structure measures. The positive aspects of the announcement onlyappear for a company with a low likelihood of being taken over, and with a low risk of minority shareholderexpropriation. Specifically, stock repurchase programmes are good news when the firm is supported by foreigninstitutional investors, and in the case of controlled firms, when the firm has a second large shareholder,which guarantees an effective balance of power for the controlling shareholders.

KEY WORDS: Open market share repurchases, undervaluation, ownership structure

1. Introduction

The popularity of open market repurchases has increased significantly in recent years in a largenumber of countries. In the USA, Grullon and Michaely (2002) report that while repurchasesaccounted for 13.1% of dividends in 1980, they represented 104.4% of dividends in 1998. Canada,the UK and Germany also experienced increases in repurchase activity. In France, open marketstock repurchase programmes have also increased dramatically since the 2 July 1998 law came intoeffect, introducing provisions that simplified their implementation and modified their taxation.The regulation of open market repurchases is very similar across all European countries thanksto the presence of a European directive on the subject. Thus, in France, as in most Europeancountries, repurchase programmes target a maximum of 10% of the capital over an 18-monthperiod. While Rau and Vermaelen (2002) identify only 25 announcements of stock repurchasesby French firms over the period January 1985 to June 1998, 381 stock repurchase programmes wereapproved by the Commission des Opérations de Bourse (COB)1 during the first year followingthe 1998 law. It is this inflow of operations that induced us to study stock repurchases in France,since prior to the passage of the law, they had never been the subject of any specific academicstudy.

Correspondence Address: Edith Ginglinger, CEREG, Paris-Dauphine University, place du Maréchal de Lattre de Tassigny,75775-Paris cedex 16, France. Email: [email protected]

1351-847X Print/1466-4364 Online/06/010077–18 © 2006 Taylor & FrancisDOI: 10.1080/13518470500039543

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78 E. Ginglinger & J.-F. L’Her

What accounts for this enthusiasm for open market stock repurchases? The predominant expla-nation is that the announcement of a stock repurchase programme allows managers to signalthat their companies are undervalued. This theory has been borne out by empirical observa-tions. Announcements of stock repurchases typically occur after a period of poor performance(Comment and Jarrell, 1991; Ikenberry et al., 1995), are greeted by an overall positive reaction,and are followed by favorable long-term performance (Ikenberry et al., 2000). Another explana-tion is related to free cash flows. By returning free cash flows to shareholders, buybacks mitigateconflicts between shareholders and managers.

In this article, we study the price reaction to the announcement of an open market stock repur-chase programme in France. We also explore the impact of the ownership structure on the wealtheffect. The French market is a concentrated stock ownership market. According to Faccio andLang (2002), only 14% of French firms are widely held. In a closely controlled company, major-ity shareholders appoint managers directly – and fire them if they deem it necessary. They aretempted to collect private benefits. Minority shareholders often find it very difficult to have theirinterests addressed. That is why French firms, like most European firms, are characterized by amajor agency conflict, not between managers and shareholders, but between controlling share-holders and minority shareholders.We explore whether repurchase programmes reduce or enhancethis conflict.

A stock repurchase may result in a greater ownership concentration or in an increase in the trans-fer of voting shares to employees, for it is often assumed that employees will support management.In these cases, share buybacks may reduce the likelihood of a takeover, and may trigger a decreasein firm value. Repurchases are thus likely to strengthen the hand of controlling shareholders. Wefurther explore the extent to which the following corporate governance characteristics influencethe wealth effect of the buyback announcement: the identity of owners, particularly family share-holding owners, the presence of a second large shareholder and of foreign institutional investors,and the discrepancy between cash flow rights and control rights.

It appears that the announcement of a stock repurchase programme in France is usually goodnews for investors: an overall positive reaction of +0.57% is recorded for the period includingthe day of the announcement and the day following it. Results are increasingly positive whenfirms are listed on secondary or new markets, when they participate in a parallel vote to autho-rize a reduction in capital, and when their performance for the period preceding the vote forthe stock repurchase programme is poor. The market reaction to a buyback announcement isstrongly contingent on ownership structure. We show that for controlled firms, the market reac-tion is positive, all things being equal. Our results establish that the announcement of a stockrepurchase programme, which may lead to a larger concentration of ownership, is good newsfor investors when the firm serves the interests of external investors. The presence of foreigninstitutional investors among the shareholders as well as the existence of a second large share-holder, in the case of controlled companies, that guarantees an effective balance of power forthe controlling shareholders, are signs of good minority protection. However, the market reactionto family-controlled firms is less favourable, due to the large discrepancies that exist betweencash flow rights and control rights, and to the relative scarcity and weight of the second largeshareholder.

The article is organized as follows: in the next section, we describe the institutional context inFrance and formulate our hypotheses, and in the third, describe the data and sample selection. Thefourth section presents the market reaction to the announcement of open market stock repurchaseprogrammes. The fifth section examines explanatory factors of observed market reactions, andconclusions are drawn in the sixth and final section.

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Ownership Structure and Open Market Stock Repurchases in France 79

2. Stock Repurchases in France

2.1 The Institutional Context of Stock Repurchases in France

2.1.1 Legal provisionsThere are two methods available for firms to repurchase shares in France: the fixed price tenderoffer and the open market repurchase programme. In the first case, there is no limit to the percentageof capital subject to repurchase. However, while investment income from repurchase tender offersis taxed as a dividend, it nonetheless does not enjoy the dividend tax credit on the differencebetween the bid and cost prices. This fiscal clause is not advantageous for individuals who aresubject to income taxes, and who would thus benefit from selling their stocks on the market priorto the tender offer. This article focuses exclusively on open market stock repurchase programmes.

Open market stock repurchases were authorized by the 2 July 1998 law, which stipulates alimit of 10% of capital, and a maximum period of 18 months. The objectives and terms of theopen market stock repurchase are defined at the annual general meeting of shareholders. Foreach 24-month period, subject to the cancellation authorization given at the special meeting ofshareholders, stocks may be cancelled within a 10% limit of existing capital. Firms can use sharesacquired to grant stocks or options to their employees, stabilize stock prices, exchange stocks forexternal growth transactions, reduce or eliminate dilution related to the conversion of convertiblebonds, or hold the stocks within the 10% capital limit. Repurchases may be financed by cash orthrough debt financing. Before the 2 July 1998 law, firms could acquire shares in order to stabilizestock prices or with a view to distributing them to their employees. However, a specific reasonwas required, and the acquired stocks could not be cancelled. According to the 1998 law, gainsmade by shareholders are subject to capital gains tax. Firms are required to pay a fee of 0.15% ofthe total value of shares repurchased to the Commission des Opérations de Bourse.

Repurchase programme regulation in France is very similar to the situation in other Europeancountries. In fact, it is subject to the applicable European directive. In the USA, repurchaseprogrammes have no limitations with respect to capital proportion or duration. In Canada, theprogrammes target, over a period of 12 months, a maximum of 5% of the shares or 10% of the float.

2.2 Hypotheses

We first explore the traditional signalling hypothesis. We then go on to show that the implicationsof repurchase plans for outside investors are conditional on the ownership structure. Dependingon the prior ownership structure, adopting an open market stock repurchase programme maycontribute to reinforcing control by large shareholders.

2.2.1 Undervaluation signalling hypothesisThe most frequently encountered explanation for stock repurchases is the information-signallinghypothesis. Share repurchases are thus a means through which management can signal its beliefthat the firm’s stock is undervalued. Stephens and Weisbach (1998) highlighted negative abnormalreturns during the period preceding the announcement of the buyback programme, indicating thatfirms repurchase when their stock price is perceived as being undervalued. This effect should beheightened for smaller firms characterized by a higher degree of asymmetric information, andfollowed less closely by financial analysts. Because these firms are more vulnerable to inaccuratemarket evaluation, the repurchase can signal an undervaluation of their shares. In general, asDittmar (2000) maintains, whatever the justification for the stock repurchase, the announcement ofthe buyback, along with the buyback itself, are more likely to take place when the share price is low.

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Thus, even if the initial purpose of the stock repurchase programme was not to highlight a stock’sundervaluation, the managers’ timing for the announcements of stock repurchase programmesshould trigger negative abnormal returns during the period preceding the announcement.

H1. According to the undervaluation signalling hypothesis, the weaker the preceding perfor-mance, the more positive the reaction of the market to the announcement of a repurchaseprogramme should be.

2.2.2 Open market stock repurchase programme and shareholder ownership structureThe ownership structure of a company greatly affects the information content of the stock repur-chase programme. On the one hand, buybacks can be seen as good news for the market, becausereturning free cash flows to shareholders purportedly mitigates the agency conflict between man-agers and shareholders. On the other hand, the stock repurchase programme may effectivelydiscourage takeovers. When a firm repurchases its own stock, it in fact leads to a strengtheningof the weight of the majority shareholders. These shareholders do not sell their shares when therepurchase programme is implemented. The shares that are repurchased then lead to a reductionin the float and to an increase in the proportion of shares held by majority shareholders. If 10% ofthe floating stock shares are repurchased, a majority shareholder with 45% of the capital will thenhold 45/90, i.e. 50% of the capital. This result is valid whether shares are cancelled or not, since inFrance, securities held by the firm lose their voting rights. Most probably, it would then be associ-ated with a less favourable price reaction, as studies on takeover defences have shown (Commentand Schwert, 1995). Thus, a company characterized by weak control can be suspected of actingwith the intention of reinforcing the control of current shareholders. A repurchase programmeintended to strengthen employee shareholding can also serve as a takeover defence mechanism.Many repurchase programmes are meant to allot shares to employees. These repurchases lead toa reduction in the float, and to an increase in the percentage of the capital held by employees.Further, with employees usually being legitimist, and supporting the management appointed bymajority shareholders, as the case may be, repurchase programmes induced by employee share-holding plans lead to a strengthening of the position of majority shareholders. Thus, Gordon andPound (1990) and Beatty (1995) show that announcing an employee shareholding plan results ina negative share price reaction if the firm is subject to a takeover attempt, but elicits a positivereaction in the opposite case.

Shleifer and Vishny (1997) argue that in controlled firms, agency costs are incurred betweenminority and controlling shareholders. Large shareholders can inflict substantial costs on othershareholders in the form of wealth redistribution. The more concentrated the shareholder own-ership, the less it becomes possible for other investors to make their voices heard, and the lessthe information available on the firm. Ownership concentration may therefore be associated withless active corporate governance. Share buybacks are likely to reinforce the power of controllingshareholders, and may reduce the likelihood of a takeover (Bradley and Rosenzweig, 1986; Stulz,1988), and trigger a decrease in the firm’s value.

H2. Repurchase programmes aimed at reducing the probability of a taking over of control elicitnegative responses in the market.

In France, most firms are closely held.2 How does this ownership pattern affect the informationcontent of the buyback? Majority shareholders have strong incentives to maximize the firm value

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and to oversee managers. According to Shleifer and Vishny (1986), concentrated shareholdingsraise firm value by overcoming free-rider problems that affect widely held firms. Ownershipconcentration should therefore be associated with more active control, and with managers actingin favour of shareholders. Furthermore, a firm with majority shareholders, and that is not at riskof imminent dilution, is also not a candidate for a hostile takeover attempt, which precludes therepurchase programme simply being a takeover defence mechanism. Buyback announcementsshould therefore be good news for the market.

H3. The announcement of a repurchase programme by a firm under majority shareholder controlis welcomed favourably by investors.

2.2.3 The identity of ownersLa Porta et al. (1999), Claessens et al. (2000) and Faccio and Lang (2002) report that unlike withAnglo-Saxon countries, the vast majority of publicly traded companies around the world are familycontrolled.3 When outside shareholder protection is intermediate, Burkart et al., (2003) concludethat firms remain family-controlled. To avoid tunnelling (Johnson et al., 2000) by insiders, andto control managerial discretion, the founders or their heirs must stay on as large shareholders.In France, many companies are family controlled. We explore the relationship between familycontrol and market reaction to the buyback announcement. Individuals or families are often largeshareholders because they are the founders of the firm. While they may be strongly committed tothe success of the firm, they may also engage in in-fighting. According to Burkart et al. (1997),too much monitoring can also reduce managerial initiative.

Gomes and Novaes (2001) estimate that conflicts between controlling and minority shareholdersincrease when the controlling shareholders participate in the firm’s management. This situationfrequently occurs in family controlled firms. Furthermore, in France, the discrepancy betweencash flow rights and control rights is most pronounced in family controlled firms. The negativeeffect of the buyback announcement for these companies may thus be enhanced. Claessens et al.(2002) demonstrate that concentrated ownership in East-Asian countries is associated with ahigher market-to-book ratio, but that the divergence between cash flow rights and control rightsis associated with value discounts for family controlled firms.

H4. The identity of shareholders affects the market response to the announcement of a repurchaseprogramme. Specifically, family controlled firms should react more negatively since familycontrol is often associated with a major divergence between cash flow rights and controlrights, and since it inherently implies a higher risk of private benefits being collected.

Further, the identity of the second shareholder also plays a determining role in share buybackprogrammes. Gomes and Novaes (2001) showed that the existence of several large shareholdersprotects minority shareholders, owing to the negotiations stimulated. A second large shareholdermay guarantee that the repurchase programme benefits all shareholders.

An additional objective is to examine the relationship between foreign institutional owner-ship and share price reaction to the announcement of a repurchase programme. Dahlquist andRobertson (2001) found that foreign investors avoid firms with a dominant owner, and seem toattach considerable importance to such owners’ influence in the firm. Khanna and Palepu (1999)conclude that the performance of Indian firms is positively correlated with the presence of foreigninstitutional ownership. We therefore postulate that the presence of foreign institutional investors

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positively influences the price reaction to the announcement of repurchase programmes. Theirpresence is a form of moral guarantee of non-hostile financial decisions with regard to minorityshareholders.

H5. The presence of a second large shareholder or of institutional investors leads to a morefavourable reaction.

Below, we explore the implications of the above studies in the context of French open marketstock repurchase programmes. Specifically, we examine the impact of ownership structure andfamily control on the price reactions to the announcement of a stock repurchase plan, as well asthe consequences of the presence of a second large shareholder.

3. The Data Set

3.1 Construction of the Sample

During the first year following the enactment of the 2 July 1998 law, 381 companies introducedopen market stock repurchase programmes. All the data analysed in the study originates fromregistration statements published by the companies at the time of the adoption of their stockrepurchase programmes, and which were certified by the COB. These registration statementsdescribe the detailed characteristics of the stock repurchase programmes. They also specify theownership structure and the intentions of the main shareholders.

Daily total returns are drawn from the Data Stream database. The market index is an equal-weight market index computed from all French firms included in Data Stream.4 363 of the 381stock repurchase announcements identified over the period July 1998 to July 1999 have sufficientreturns in the Data Stream database to be considered in the study.5

3.2 The Announcement Date

Firms must file their repurchase programme registration statements with the COB. The COBfiling date thus represents the first possible announcement date. In addition, the COB recordsthe issued registration statements; the issuing date corresponds to the date when decisions arerecorded, which usually follows the filing date by 2 to 4 market days (on average 4 calendardays later, but with limiting values ranging from 1 to 27 days). On this issuing date, informationis made available on the COB website. We also collected the information dates publicized inthe "Européenne des données"database, which comprises the dispatches of Agence France Press(AFP), official statements issued by firms, and articles from leading French daily newspapers (lesEchos, la Tribune, le Monde, etc.). When an announcement date was available in this database,it corresponded to the COB issuing date in 90% of cases; in the remaining cases, it correspondedto the day preceding or following this date. Consequently, we consider the COB issuing date asthe announcement date for the stock repurchase programme.

3.3 Description of Open Market Stock Repurchase Programmes According to OwnershipStructure

Table 1 reports descriptive statistics for the overall repurchase sample, and for subsamples bycontrol type. A firm is considered controlled when the primary shareholder holds at least a third

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Table 1. Descriptive statistics for 363 open market share repurchase announcements between July 1998 andJuly 1999 in France

DispersedTotal sample ownership Family control Other control

Observations (percentage of totalnumber of observations)

363 (100) 63 (17.35) 147 (40.50) 153 (42.15)

Panel A. Motives for therepurchase programme

Primary objective (in % of totalobs.)

Price stabilization 74.7 55.6 82.3 75.2Cancellation 9.9 15.9 4.8 12.4ESOP and stock options 6.1 11.1 5.4 4.6Other 9.3 17.4 7.5 7.8

Price stabilization objective only (in% of the number of observations)

20.4 19.0 19.0 22.2

Employees among the first threeobjectives (in %)

55.4 47.6 61.9 52.3

Possible cancellation (in %) 46.8 58.7 36.7 51.6Vote on authorization to reduce the

capital (in %)35.8 41.3 26.5 42.5

Panel B. Size, financing andmarket listing

Size of the programmeAverage (median) maximum

authorized amount, in millions ofEuros

335.51 (23.38) 1048.09 (99.30) 83.33 (12.96) 289.04 (40.53)

Average (median) max. % ofrepurchased capital

9.37 (10) 9.44 (10) 9.33 (10) 9.38 (10)

Average (median) probable % ofrepurchased capital

7.15 (9.11) 6.92 (7.80) 6.93 (8.80) 7.46 (9.74)

Main financing type (in % oftotal obs.)

Cash 87.6 63.5 93.9 91.5Debt 5.5 6.3 5.4 5.2Not available 6.9 30.2 0.7 3.3

Listing market (in % of total obs.)First market (monthly settlement) 39.9 55.6 19.7 52.9First market (cash settlement) 10.5 1.6 10.2 14.4Secondary market 41.9 36.5 55.8 30.7New market 7.7 6.3 14.3 2.0

Panel C. Ownershipcharacteristics

Shareholder ownership, in % ofvoting rights, mean (median)

First shareholder 51.87 (57.23) 13.11 (12.0) 60.61 (62.93) 50.87 (52.11)Float 36.97 (31.18) 76.07 (78.50) 28.64 (26.60) 36.53 (32.34)Foreign identified institutional

investorsa2.18 (0) 4.49 (0) 1.31 (0) 2.06 (0)

(continued)

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Table 1. Continued

DispersedTotal sample ownership Family control Other control

French identified institutionalinvestorsa

3.22 (0) 5.44 (0) 1.45 (0) 4.0 (0)

Employees 1.01 (0) 1.46 (0) 0.87 (0) 0.96 (0)% of capital expected from the

exercise of options1.02 (0) 1.83 (0) 0.70 (0) 1.01 (0)

Intention of main shareholders (%of number of obs.)

Possible participation 13 0 16 17Do not participate 49 0 66 54Not applicable or information not

available38 100 18 29

The table illustrates the characteristics of the announcements for the total sample, by ownership structure. Family controlencompasses all firms whose primary shareholders are individuals or groups of individuals. Other types of control relateto firms with the first shareholders being banks, insurance companies or non-financial companies.aThe identified investors correspond to those mentioned in the registration statements published by the companies at thetime of the adoption of their stock repurchase programmes.

of the voting rights, and when no other shareholder holds a more significant proportion of the votingrights. Under French law, decisions of the special shareholders’ general meeting require a two-thirds majority. Shareholders owning a third of the shares can block these decisions. Furthermore,when no other shareholder owns more than a third of the shares, it can be presumed that the firstshareholder is powerful.

First, we recognize family control, which groups all firms in which the primary shareholderis an individual or a group of individuals. Other types of control consist of firms held by banksor insurance companies, and by non-financial companies and state-owned firms. Most firms arefamily owned (147 stock repurchase programmes). There are 69 firms under financial control inthe sample, and 84 with different control types. Lastly, widely held firms were responsible for 63such programmes.

Four objectives of the stock repurchase programme are considered (Table 1, Panel A): cancella-tion, granting of stock option plans or stocks to employees, price stabilization, and other objectives(holding, exchange, reversing of cross-holding positions, exchangeable bonds). The registrationstatements consulted indicate that most stock repurchase programmes have multiple objectives.Price stabilization is the principal motivation for stock repurchases (75% of the programmes).Share cancellation is considered the principal objective by only 10% of the companies considered.For the entire sample, the cancellation of shares is not explicitly excluded in 47% of the cases.This option entails a vote at a special general shareholders’ meeting authorizing the reduction ofthe capital for 131 programmes (36%).6 Stabilization is the sole purpose of the programme for20% of cases observed. Granting of stocks to employees is considered as the primary objectivefor 6% of the programmes, and appears among the first three objectives for 55% of the sample.The motives differ depending on the characteristics of the firm. For instance, cancellation is thefirst objective for 16% of the widely held firms, but for only 5% of the family controlled firms.

The average maximum amount for open market stock repurchase programmes is 335 millionEuros (Table 1, Panel B). The average programme size is much larger for widely held companies(1,048 million Euros) than for family controlled firms (83 million Euros). Given that the maximum

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proportion of shares authorized by the general shareholders’ meeting is frequently equal to themaximum legal repurchase amount, or 10% of the capital, the value of the programmes veryclosely correlates with the size of the company. The firms also specify the proportion of the sharesthey intend to repurchase, which for our sample, is 7.15% on average.

The repurchases are financed by cash in 87.6% of the programmes. However, most programmesdo not exclude debt financing. 5.5% of the programmes use debt financing, while 6.9% do notspecify the form of financing, particularly for reversing cross-holding positions.

Stock repurchases primarily occur in firms listed on the monthly settlement and secondarymarkets,7 which account for 82% of the open market stock repurchase programmes announced.70% of the family controlled firms in our sample are traded on secondary or new markets, whilethe proportion is only 43% for widely held firms.

Table 1 (Panel C) illustrates the ownership characteristics of the firms in our sample. On average,the largest shareholder holds 52% of the voting rights and the float is only 37% of the voting rights.The percentage of the voting rights held by employees is 1.01% on average, while that of the non-exercised options is 1.02%. This data probably understates the real situation to the extent thatonly indications appearing in the registration statement were used. On average, the data is lowerthan the values indicated by Fenn and Liang (2000) in the USA, who obtain percentages of 5.9and of 2.3 respectively for the managers only. However, if we only take into account widely heldFrench firms, the percentage of the capital that can be attributed to unexercised options will be1.83%.

In general, family owned firms are closely held (the primary shareholder has 60.61% of thevoting rights). The float in voting rights is 28.64% for these firms, compared with 76.07% forwidely held companies and 36.53% for other controlled firms. Foreign identified institutionalinvestors own 4.49% of the shares of the widely held firms, compared with 2.18% for the wholesample.

The principal shareholder may indicate whether or not it will take part in the open marketstock repurchase programme. In 38% of the cases, no intention is stated because of the dispersedownership structure. In the other situations, the principal shareholders generally pre-commit notto take part in the open market stock repurchase programme (49% of the cases). In 13% of theprogrammes, the principal shareholders do not rule out the possibility of selling some of theirshares in the programme.

3.4 Corporate Governance Issues and French Controlled Firms

Below we examine the ownership structure of the controlled firms in more detail, according towhether or not they are family owned (Table 2). We will scrutinize the use of double voting rights inrelation to the type of control. French firms’charters may specify that a stock registered for at leasttwo years (and for at most four years for listed firms) include double voting rights. These rightsare not negotiable, and are lost when the shares are sold. The double voting rights strengthen thecontrolling shareholders’ power and accentuate the dissociation between ownership and control.In France, the cash flow ownership rights of the controlling shareholders are substantially differentfrom their voting rights.

Family controlled firms are more closely held than other controlled firms, expressed as apercentage of the capital (51.81% versus 46.30%), and as a percentage of the voting rights (60.61%versus 50.87%). Further, there is a greater variance between voting rights and cash flow rightsin family owned firms: the addition of voting rights compared with the cash flow rights of thecontrolling shareholder, in relative value, is 20.52% for family owned firms, and 10.71% for other

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Table 2. Characteristics of ownership of controlled firms: family control versus other control

Family Othercontrol control Difference

Characteristics (147 firms) (153 firms) in means Student ta

Percentage of capital held by the firstshareholder (%) (S1)

51.81 46.30 5.51 2.35∗∗

Percentage of voting rights held by thefirst shareholder (%) (VRS1)

60.61 50.87 9.74 3.93∗∗∗

Surplus of voting rights comparedwith percentage of capital:(VRS1–S1)/S1

0.21 0.11 0.10 4.95∗∗∗

Percentage of firms for which a secondshareholder holds more than 5% ofvoting rights

48.98 60.13 −11.15 −1.95∗

Percentage of capital held by the secondshareholder (S2)

5.76 7.00 −1.25 −1.21

Percentage of voting rights held by thesecond shareholder (VRS2)

5.95 7.10 −1.16 −1.10

Weight of the second shareholderrelative to the first (VRS2/VRS1)

0.15 0.22 0.07 2.21∗∗

Percentage of firms where the secondshareholder is a family memberb

14.29 6.54 7.75 2.21∗∗

Percentage of firms where the secondshareholder is of a different type fromthe first shareholderc

34.69 6.54 28.16 6.44∗∗∗

This table presents information on controlled firms that announced open market stock repurchase programmes. Datarelative to the ownership structure and some mechanisms of corporate governance are reported. For instance, French lawmakes it possible for all firms to provide in their statutes that a stock registered for at least two years (and for at mostfour years for listed firms) may benefit from double voting rights. This right is not negotiable, and is lost in the case ofa transfer of the share. The double voting right may strengthen the power of the controlling shareholders. Data on thesecond large shareholder is also reported.aWhen variances are not equal, the test is performed under the null hypothesis of non-equal variances.bAn individual or a family that is different from the first shareholder.cWhen the first shareholder is an individual investor or a family member, the second one is not, and when the firstshareholder is not a family member, the second one is.∗Significant at the 90% confidence level; ∗∗Significant at the 95% confidence level; ∗∗∗Significant at the 99% confidencelevel.

controlled firms. This result is consistent with the findings of Claessens et al. (2002) for familycontrolled companies in East-Asian countries.

In addition, the proportion of the firms in which a second shareholder holds more than 5% ofthe voting rights is 49% for family owned firms and 60% for other controlled firms. The weightof the second shareholder’s voting rights relative to the first shareholder’s voting rights is 15%for family controlled firms and 22% otherwise. Existing literature on the subject highlights theimportance of the second large shareholder in the balance of power. Bargaining problems amongblock holders may prevent decisions that harm minority shareholders (see for example, Gomesand Novaes, 2001). However, in the case of family controlled firms, a second shareholder is lesscommon, and is often an individual as well (in 29% of the cases). Furthermore, the individualshareholder also tends to hold a more significant percentage of the voting rights.

These observations highlight a will to exercise tighter control, notably through double votingrights and a lower balance of the power of the second shareholder, for family owned firms.

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The situation of the minority shareholders thus appears less enviable in these firms. Differencesrelated to the ownership structure therefore lead us to question the wealth effect of stock repurchaseprogrammes announcement for these firms.

4. Market Reaction to Stock Repurchase Programme Announcements

In this section, we test the null hypothesis of no price reaction to the announcement of a stockrepurchase programme. The methodology is presented first, followed by the corresponding results.

4.1 Methodology

The methodology used to estimate the abnormal returns associated with the French stock repur-chase programme announcements includes two distinct steps: (1) the estimation of abnormalreturns for each stock repurchase programme announcement; (2) the aggregation of the abnormalstock returns to estimate average and cumulative average residuals, as well as the correspondingstatistics. The stock return-generating model used to estimate the abnormal returns is the marketmodel. The window used to estimate the parameters is [−230, +5].

4.1.1 Step 1To estimate the abnormal stock returns surrounding each repurchase programme announcement,the one-step methodology introduced by Dufour (1980) and Binder (1985) is used. This dummyapproach allows the direct estimation of the parameters of the market model as well as the abnormalreturns associated with the stock repurchase. For each stock repurchase programme, we thereforeran the following time-series regression and estimated the parameters using the ordinary leastsquares method:

Rit = αi + β∗i Rmt +

+5∑

s=−5

λ∗isDs + εit ; where t ∈ [−230, +5] (1)

where:

Rit : return of stock i on day t; t = 0 represents the stock repurchase programme announcementday

αi : intercept of the modelβi : systematic risk of stock i

Rmt : equally weighted market return for day t8

λis : stock i abnormal return for day s of the announcement window [−5, +5]Ds : dummy variable which equals 1 when t = s and 0 otherwiseεit : error term of the regression.

4.1.2 Step 2In the second step, we estimated the average abnormal return (AR) for the 363 stock repurchaseprogramme announcements, for each trading day of the announcement window, as well as thecross-sectional standard deviation and the corresponding statistical tests. The average abnormal

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return for the date s ∈ [−5, +5] is thus given by

ARs = 1

363

+363∑

i=1

λis; where s ∈ [−5, +5]

The cross-sectional standard deviation used, σ(ARs), is calculated across the 363 correspondingobservations, and the following statistical test is used:

ts = ARs

σ(ARs)/√

363; where s ∈ [−5, +5]

The tests associated with cumulative average residuals (CARs) are calculated using the cross-sectional standard deviation of CARs instead of ARs.

4.2 Event Study Results

Table 3 illustrates the main results of the estimates relating to the model specification pre-sented above. For the day of the announcement, the average residual, AR0, is positive (+0.35%)and significantly different from zero at the 99% confidence level. We consequently rejectthe null hypothesis for the day corresponding to the announcement of the repurchase pro-gramme. The average residual for the trading day following the announcement, AR1, is lower(+0.23%), but still significant at the 90% confidence level. The average cumulative residual overdays 0 and 1, CAR0,+1 is significantly different from 0 at the 95% level, and corresponds to+0.57%.

Our results show a positive +0.57% impact of the stock repurchase programme over the period[0, +1]. The findings are consistent with what is observed in other countries. Indeed, Comment

Table 3. Average residuals and cumulative average residuals sur-rounding the announcements of French open market stock repurchase

programmes

Trading days AR t test CAR t test

t = −5 0.100 0.603t = −4 −0.182 −1.108t = −3 0.109 0.920t = −2 −0.023 −0.176t = −1 0.093 0.651t = 0 0.346 2.672∗∗∗t = 1 0.228 1.770∗ 0.574 3.264∗∗∗t = 2 −0.099 −0.844 0.475 2.204∗∗∗t = 3 0.116 0.649 0.591 2.166∗∗∗t = 4 0.126 0.965 0.717 2.405∗∗∗t = 5 −0.013 −0.087 0.705 2.147∗∗

The table reports the average abnormal return (ARs in %) as well as the corre-sponding statistical tests for the 363 stock repurchase programme announce-ments, for each trading day of the announcement window (s ∈, [−5, +5]).It also reports the cumulative average residuals (CARs in %) over the period[0, +1] to [0, +5] and the associated statistical tests.∗Significant at the 90% confidence level.∗∗Significant at the 95% confidence level.∗∗∗Significant at the 99% confidence level.

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and Jarrell (1991) show that the reaction to the announcement of an open market repurchaseprogramme is +2.3% in the USA. Ikenberry et al. (1995) find a 3.54% reaction to the announce-ment for the 1980–1990 period. When more recent periods are considered, reactions seem tobe much less favourable. Kahle (2002) observes a 1.61% reaction over the 1993–1996 period,while Klassen and Sivakumar (2001) find 0.82% over the 1995–1999 period. Li and McNally(1999) report a significant price reaction of 0.87% for Canada, for a 3-trading-day window. Overthe 1985–1998 period, Lasfer (2000) obtains a positive 1.64% price reaction in the UK and apositive 1.06% price reaction in continental Europe. For the 51 French open market repurchaseprogrammes in his sample, he observes an insignificant price reaction of 0.78%. Thus, the pricereactions to the announcement of an open market repurchase programme in recent periods appearless favourable than those documented in earlier studies.

5. Explanatory Factors Respecting Stock Price Reactions to Repurchase Programmes

In this section, we examine the explanatory factors respecting the abnormal stock returns,CARs0,+1, associated with the stocks of companies that have made a repurchase programmeannouncement. Table 4 presents the model specifications used to explain the abnormal stockreturns following the announcement of a repurchase programme.9 The following variables aretaken into account:

PERF is the average daily abnormal return during the 6 months preceding the announcement ofthe stock repurchase programme;

REDU is a dummy variable that is equal to 1 if the firm has ratified an authorization to reduce itscapital;

MARKET is a dummy variable, which is equal to 1 if the firm is traded on the secondary or thenew market;

TAKEOVER is a dummy variable that is equal to 1 if the first shareholder holds more than 20%of the voting rights and the float is greater than 50%;

CONTROL is a dummy variable that is equal to 1 for controlled firms;CFAM is a dummy variable that is equal to 1 for family controlled firms;WS2DIFF = W x S2DIFF, where W = VRS2/VRS1 stands for the weight of the second share-

holder’s voting rights (VRS2 = percentage of voting rights held by the second shareholder)relative to the first (VRS1 = percentage of voting rights held by the first); S2DIFF is a dummyvariable that is equal to 1 if the second shareholder is of a different type from the first (whenthe first shareholder is an individual investor or a family member, the second one is not, andwhen the first shareholder is not a family member, the second one is);

FORINST is a dummy variable that is equal to 1 if foreign institutional investors are identified inthe firm’s registration statement. This dummy variable underestimates the weighting of theseinvestors. At the same time, however, the mention of their presence in the registration statementclearly indicates that the company takes their interests into account.

5.1 Timing of the Buyback Announcement, Signalling and Market Reaction

In a signalling framework, managers view the stock as undervalued and announce a repurchaseprogramme to signal the fact. It is difficult to determine with certainty whether the stock priceis undervalued. One indication is a history of low prior performance of the firm. In our models,

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Table 4. Explanatory models of price reaction to announcements of open market stock repurchaseprogrammes

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Intercept 0.0002617 −0.005913 −0.005166 0.0002592 −0.001555 −0.005130.064 −1.228 −1.116 0.063 −0.368 −1.116

PERF −2.850 −2.688 −2.596 −2.745 −2.774 −2.486−3.482∗∗∗ −3.244∗∗∗ −3.139∗∗∗ −3.375∗∗∗ −3.418∗∗∗ −3.024∗∗∗

REDU 0.0070261.883∗

MARKET 0.007556 0.00721 0.007331.953∗ 1.890∗ 1.936∗

TAKEOVER −0.01539 −0.00139 −0.01445 −0.01509 0.01615 −0.0141−2.372∗∗ −2.12∗∗ −2.20∗∗ −2.343∗∗ −2.501∗∗ −2.157∗∗

CONTROL 0.0108 0.01134 0.01190 0.01007 0.01055 0.011162.196∗∗ 2.315∗∗ 2.425∗∗ 2.058∗∗ 2.158∗∗ 2.287∗∗

CFAM −0.00780 −0.00928 −0.009683 −0.009467 −0.00908 −0.01138−2.027∗∗ −2.309∗∗ −2.415∗∗ −2.442∗∗ −2.344∗∗ −2.819∗∗∗

WS2DIFF 0.03053 0.02983 0.03012.520∗∗ 2.466∗∗ 2.501∗∗

FORINST 0.009151 0.00727 0.008792.042∗∗ 1.652∗ 1.974∗∗

F 5.605∗∗∗ 4.770∗∗∗ 4.881∗∗∗ 5.821∗∗∗ 5.330∗∗∗ 5.139Adjusted R2 0.048 0.059 0.060 0.062 0.067 0.074

The sample comprises 363 announcements of stock repurchase programmes. The dependent variable is the abnormalreturn over the [0, +1] period. The independent variables are: PERF, the average daily abnormal return during the 6months preceding the announcement of the stock repurchase programme; REDU, a dummy variable that is equal to 1 ifthe firm has voted for an authorization to reduce its capital; MARKET, a dummy variable that is equal to 1 if the firmis traded on secondary or new markets; TAKEOVER, a dummy variable that is equal to 1 if the first shareholder holdsmore than 20% of the voting rights and if the float is greater than 50%; CONTROL, a dummy variable that is equal to1 for controlled firms; CFAM, a dummy variable that is equal to 1 if there is family control; WS2DIFF = WxS2DIFF,where W = VRS2/VRS1 stands for the weight of the second shareholder’s voting rights (VRS2 = percentage of votingrights held by the second shareholder) relative to those of the first (VRS1 = percentage of voting rights held by the first);S2DIFF, a dummy variable that is equal to 1 if the second shareholder is of a different type from the first (when the firstshareholder is an individual investor or a family member, the second one is not, and when the first shareholder is not afamily member, the second one is); FORINST, a dummy variable that is equal to 1 if foreign institutional investors areidentified in the firm’s registration statement; and t-test values, which appear under the coefficients.∗Significant at the 90% confidence level; ∗∗Significant at the 95% confidence level; ∗∗∗Significant at the 99% confidencelevel.

we include the variable PERF, which is the average daily abnormal return during the 6 monthspreceding the announcement of the stock repurchase programme. We find that the market reactionis inversely related to prior performance: all PERF coefficients are negative and significant at the99% confidence level. This finding is consistent with Stephens and Weisbach (1998), who showthat firms repurchase stock after negative performances during the quarter preceding the buyback.We thus validate our first hypothesis.

The market reaction is more positive (+0.7% at the 90% confidence level) for firms listedon secondary or new markets. These firms are characterized by a higher degree of asymmetricinformation and are followed less closely by financial analysts. They are more susceptible toinaccurate market evaluation and can signal the undervaluation of their shares by the repurchase.

Furthermore, the price reaction is more positive when the programme is intended to encouragethe authorization of reduction of capital. For the total sample, the possibility of cancelling the

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repurchased stocks incurs a more favourable reaction of +0.7% at the 90% confidence level(REDU, Table 4, model 2).

5.2 Ownership Structure and Market Reaction

Below, we examine several features of the ownership structure which may help to explain the mar-ket reaction: takeover defence mechanisms, the type of control, the presence of foreign institutionalinvestors, and the existence of a second large shareholder for controlled firms.10

The price reaction is highly unfavourable when investors interpret the repurchase as a takeoverdefence mechanism. Thus, all things being equal, when the principal shareholder holds more than20% of the voting rights, and when the float is higher than 50% (TAKEOVER = 1), the stockprices drop by approximately −1.5% (Table 4, models 1 to 6). This evidence is consistent withthe results of Denis (1990) and Nohel and Tarhan (1998).

These authors demonstrate that a firm likely to be the target of a tender offer elicits a dramat-ically less favourable price reaction when the repurchase programme is announced. Indeed, therepurchase may reduce the probability of a takeover, and thus the potential premium to currentshareholders. These results allow us to validate hypothesis number 2.

We have determined that a controlled firm experiences a more favourable market reaction(+1%) than a widely held firm (variable CONTROL = 1). As there is no risk of takeover, amajority controlled firm does not need to use repurchase programmes as a takeover defencemechanism, as there is no risk of takeover. This result is in sync with hypothesis number 3.However, family controlled firms exhibit a less favourable price reaction (−0.9%) when therepurchase programme is announced (variable CFAM = 1) (Table 4, models 1 to 6). These resultshighlight the influence of both ownership structure and owner identity on the market reaction tobuyback announcements. Several studies have found that ownership concentration and the identityof owners have a direct impact on the profitability and the value of companies. For instance, forGerman firms, Lehman and Weigand (2001) conclude that having financial institutions as thelargest shareholders enhances short-term profitability, whereas family owned firms experiencelower profitability. Claessens et al. (2002) show that firm valuation increases with the cash flowownership held by the largest shareholder.

However, they report a negative effect for large deviations between ownership rights and control,and show that these results appear to be conditioned by family control. A repurchase programmemay enhance shareholder concentration, and the market reaction to the announcement takes intoaccount the positive and negative effects of possible increased ownership concentration. Thisresult corroborates our hypothesis number 4.

A large body of literature on corporate governance highlights the importance of the presenceof a second large shareholder in a controlled firm. This shareholder may discipline the controllingshareholders and guarantee equitable treatment for the minority shareholders. Our results show thatthe presence of a second large shareholder of a different type from the first shareholder (non-familyowner if the first shareholder is a family member, and vice versa) has a highly favourable effect(Table 4, models 4 to 6, WS2DIFF variable). The greater the weight of the second shareholder, themore favourable the reaction: if the second shareholder possesses the same voting rights as theprimary shareholder, the market reaction is +3%, all things being equal. This result corroboratesBoehmer (2000) and Lehman and Weigand (2001), who find that the presence of a second largeshareholder raises firm value and profitability.

All things being equal, the presence of foreign institutional investors yields a more favourableprice reaction of 0.73% to 0.92%, according to the model specification used11 (Table 4, models

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3, 5, 6). We can assume that these investors contribute to the adoption of international standardsof corporate governance, and are more vigilant with respect to the introduction of mechanismsthat run counter to their interests. Furthermore, foreign investors presumably petition for suchvalue-added structures as open market repurchase programmes. Their presence is a guarantee forother outside investors, in that they probably would not invest in a company known for treatingminority shareholders badly. These results validate our hypothesis number 5.

Our findings thus confirm the importance of the role of the shareholder type. Some typesof shareholders, for which there is a wide divergence between cash flow rights and controlrights, cause a more negative reaction to repurchase programmes. Others, such as second share-holders, who are different from primary ones or institutional foreign investors, demonstrate adisciplinary ability.

6. Conclusions

The announcement of an open market stock repurchase programme in France is associated with apositive price reaction, confirming results obtained in other countries. The effect is more positivefor smaller firms listed on secondary or new markets and those that posted negative performancesbefore the repurchase announcement. Our results stress the importance of the ownership structurein determining the market price reaction to the announcement of a repurchase programme. Thus,the positive aspects of the announcement surface only for a company with a low likelihood ofbeing taken over. In particular, while the buyback announcement plays a positive role for controlledfirms, it tends to decrease the informative effect in family controlled firms. In these firms, thereare wide differences between cash flow rights and control rights, thus enhancing the power of thecontrolling family.As a result, minority shareholders are probably rather poorly protected in familycontrolled firms due to the absence of reference shareholders (second influencing shareholder,institutional investors), that tend to discipline the controlling shareholders.

The major implication of our study is that the impact of open market stock repurchase pro-grammes cannot be studied independently of the ownership structure of the firms and of corporategovernance mechanisms.

Acknowledgements

The authors would like to thank Meziane Lasfer, two anonymous referees and the participantsat the 2000 French Finance Association meeting and at the 2002 EFMA meeting for helpfulcomments. However, any errors in the text remain the authors’ sole responsibility.

Notes1 The COB is the equivalent of the Securities and Exchange Commission in the USA.2 Faccio and Lang (2002) studied the ultimate control of firms in Western Europe. They show that 36.93% of European

firms are widely held, whereas in France this percentage decreases to 14%. 44.29% of European firms are controlledby a single family, versus 64.82% in France.

3 Looking at the 20 largest firms in 27 wealthy economies, La Porta et al. (1999) report that 30% are family controlled.Classens et al. (2000) find that with the exception of Japan, this percentage is even higher for East Asian countries.

4 We identified a population of 992 French firms out of the 1145 Data Stream firms listed on French exchanges.5 One stock repurchase announcement from Sidel was eliminated from the sample because of a highly favourable new

product announcement on the day following the stock repurchase announcement. 338 firms made one stock repurchaseannouncement while 25 firms made two.

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6 Because the motivations for the programmes are often numerous and the hierarchy employed is not always wellestablished, we consider two measurements for the possibility of cancelling the shares: mention of the reason in theinformation note and the vote at the extraordinary general shareholders’ meeting allowing the reduction of the capital.

7 The Règlement Mensuel or Monthly Settlement is the part of the First Market where the most active stocks are tradedon account. The First Market is the official list of the Paris Stock Exchange. The Secondary Market constitutes anothertier of the stock market, involving less stringent listing requirements. The new market for its part welcomes younggrowth companies.

8 We also conducted tests using the SBF250 index, which is a value-weighted index bringing together 250 companiesrepresenting all listed French companies. The results obtained are similar to those presented.

9 Since results relative to whether the primary objective of the programme is a cancellation, a price stabilization or anemployee stock ownership plan are inconclusive, they are not presented. This is probably due to the fact that mostfirms state several motives, without always specifying which one takes precedence. Ikenberry et al. (1995) study pricereaction according to the reasons given by firms in the USA. Most of the firms do not indicate the true motivation forthe repurchase, and their limited partial results do not conclusively indicate a differentiated price reaction accordingto the reason for the repurchase.

10 We also examined the impact of the presence of employee ownership or the existence of options, for which nosignificant results were obtained.

11 Stock market reaction does not depend on the presence of French institutional investors.

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Documents

Ownership structure and open market stock repurchases in France