The Impact of Treasury Share Transactions on the Value Relevance of Earnings in South Korean Listed Firms

Abstract

Purpose: Korean law grants firms broad discretion over the use and disposal of treasury shares. This unique institutional feature, combined with the Korean context in which controlling shareholders are typically in control, enables treasury share transactions, including share repurchases, to be used to pursue controlling shareholders' private interests. This study examines whether treasury share transactions influence the relationship between firm wealth and shareholder value. Design/methodology/approach: This study uses Korean public firm data and a multiple regression analysis that based on Ohlson's (1995) analytical models. Findings: The results indicate that market participants in Korea view treasury share transactions as a mechanism that increases agency problems associated with controlling shareholders. This effect is more evident when the ownership stake of the controlling shareholder is high or when treasury shares are already held at the beginning of the period. In contrast, the findings show that an increase in foreign ownership reduces the agency problems related to treasury share transactions involving controlling shareholders. Research limitations/implications: This study shows that treasury stock transactions in Korean firms are utilized for the private benefit of controlling shareholders, and that market participants are concerned that such transactions undermine the value of minority shareholders. Originality/value: This study provides empirical evidence justifying the inclusion of safeguards to protect minority shareholder rights in the revision of South Korea's treasury stock trading legislation.