Information Signaling or Agency Conflicts: What Explains Canadian Open Market Share Repurchases?

This paper examines open market share repurchases in Canada (called Normal Course Issuer Bids—NCIB). Similar to announcements of U.S. open market share repurchases, announcements of Canadian NCIBs are accompanied by a positive stock price reaction. If NCIBs signal information, then it is not in the same manner as U.S. repurchases. Canadian firms usually announce the legal maximum proportion of shares that they are entitled to repurchase rather than a target proportion as in the U.S. Thus, the signal in Canada is the announcement of the NCIB, not the target proportion. We use a conditional event study methodology to account for the discrete nature of the signal and potential endogeneity of the announcement. As an alternative to signaling, we examine whether NCIBs are used by shareholders as a means of reducing financial slack and thereby reducing the costs of agency conflicts. Our test fails to reject either the signaling hypothesis or the agency conflict hypothesis.