Stock Repurchase as a Strategic Response to the Changing Institutional Environment: The Case of Group-Affiliated Firms in Korea

초록

This paper presents an alternative view on the prevalence of stock repurchase and the changing institutional envi- ronment. We argue that the adoption of stock repurchase should be considered not only as a financial device to ad- dress information asymmetry and agency cost but also as a strategic device that powerful actors inside the firm use to mitigate outside pressure. The primary implication of this view is that, although the practice of stock repurchase is within the broad institutional rules prescribed to discipline firms toward practicing better corporate governance, the adoption and implementation of the plan itself does not prompt firms to make tangible changes in their gover- nance structures. Drawing on the behavior of group-affiliated firms in Korea, we address two questions: (1) what determines the variation of strategic responses across firms that operate under similar institutional pressure? and (2) to what extent does the adoption of stock repurchase plan buffer firms from pressures for fundamental changes in their corporate governance? Our attempt to offer an alternative explanation for the motives underlying firms’ deci- sions to buy back stock from an institutional angle deepens our understanding on the way by which organizations respond to changes in their specific institutional environments.

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