Voluntary compliance and implied cost of equity capital : evidence from Canadian share repurchase programs

Abstract

Securities legislation in Canada and around the world does not mandate firms to fulfill announced share repurchase programs. As such, a firm’s repurchase program completion rate can be interpreted as a measure of the firm’s voluntary compliance, which communicates to investors the degree to which the firm is responsible, reliable and makes good faith efforts to fulfill its announced programs. We therefore expect that the voluntary compliance may reduce the riskiness of a firm and thus its cost of capital. In a sample of Canadian repurchase programs announced between 1995 and 2004, surprisingly, we find little evidence to suggest that a significant relationship exists between the firm’s repurchase program completion rate and the cost of equity. We present a number of explanations for this result.