On-market share buybacks in Australia: Disclosure, transparency and regulation. Christine Brown 1 Monash University

Transcription

1 On-market share buybacks in Australia: Disclosure, transparency and regulation Christine Brown 1 Monash University John Handley University of Melbourne Asjeet S. Lamba University of Melbourne 1 christine.brown@monash.edu; handleyj@unimelb.edu.au; asjeet@unimelb.edu.au. This research has been funded under the Australian Research Council s Discovery Project funding scheme (project number DP ). We thank Anne Ritter for her excellent and diligent research assistance, and Kevin Davis for helpful comments. We are grateful to Julie Dang from the ASX for insights into ASX procedures.

2 2 On-market share buybacks in Australia: Disclosure, transparency and regulation Abstract This study investigates listed company compliance with the Australian Securities Exchange (ASX) Listing Rules, during the conduct of on-market (open-market) share repurchases, over the period 1997 to Australia provides a very transparent reporting regime, where as well as announcing the open and close of the buyback to the ASX, companies are required to make daily reports on their on-market buyback activity before the open of trade on the next business day. Important features of the Listing Rules protect market integrity and safeguard investors against companies transacting at artificially created prices. Using a dataset of 38,541 daily observations, we find a high level of compliance, with around 99 percent or more of the company transactions compliant with the price rules. However, companies are not always timely with their disclosure. Only 69 percent of disclosures occur within the required 30 minutes or more period before the start of trading on the next business day. Keywords: On-market buybacks; Australia; regulatory regime; compliance. JEL Classification: G18, G30, G32, G35.

3 3 1. Introduction US studies of company behaviour during the buyback period rely on survey evidence (Cook, Krigman and Leach, 2003) and more recently monthly data (Dittmar and Field, 2014). Companies in Australia are required by the Australian Securities Exchange to report any on-market repurchase activity at least half an hour before the start of trade on the next business day. This study uses the daily buyback activity data reported by Australian companies to study company behaviour and compliance with the regulations. The information reported includes the low, high and average price paid by the company on that day. This rich dataset consists of 38,541 daily observations and provides a full sample of domestic company on-market repurchase activity in Australia over the period 1997 to During this period there were 993 on-market buybacks announced with 493 unique companies completing on-market buybacks with total value around $39.9 billion. 3 The history of repurchases in Australia is relatively short because they were prohibited until 1989 and then heavily regulated until 1995 with the result that few companies repurchased shares before Following the implementation of the First Corporate Law Simplification Bill in December 1995 the growth in repurchases in Australia escalated. Companies can elect to repurchase shares off-market through an invitation to shareholders to tender shares back to the company, or they can repurchase shares in the ordinary course of trading on the stock exchange. The latter are known as on-market share buybacks and are the focus of this paper. 4 Although on-market buybacks have become an important mechanism in Australia for returning cash to shareholders there have been few studies investigating whether the existing stock exchange listing rules provide adequate protection for shareholders. Because companies possess inside information regarding the true value of the shares they may have an advantage over outsiders when repurchasing company shares. Early studies such as Mitchell and Robinson (1999) and Mitchell et al. (2001) focused on firms motivations for undertaking buybacks using a survey methodology. In a more recent study, Holub and Mitchell (2012) document firm disclosure in initial and final buyback announcements. However they do not examine firm compliance with the 2 There were few buybacks in 1996 and company compliance with the regulations and reporting was patchy. To avoid potentially contaminating our results we commenced our sample in All amounts are in Australian dollars. There are 2183 companies listed on the ASX as at 5 th October Hereafter all reference to repurchases or buybacks will refer to on-market activity unless explicitly stated otherwise. Off-market repurchases are fewer in number and are also economically important in Australia but are not studied in this paper.

4 4 daily reporting requirements under ASX Listing Rules. We fill this gap by examining whether companies comply with the regulatory requirements governing company behaviour when they are actually active in the market buying back shares. In particular, it is important to document company compliance with the listing rule that governs minimum trading before the company can enter the market to purchase shares, and the rule that sets a maximum price at which the company can transact. These rules protect shareholders, investors and support market integrity. It is not clear whether shareholders generally understand on-market share buybacks and their potential consequences. If the company is purchasing undervalued shares then the result is a wealth transfer from selling shareholders to those that do not sell. To protect selling shareholders, and also to guide and police company behaviour during the buyback so as to ensure the regulatory objectives of orderly market and market integrity, there are a number of rules and regulations governing on-market buybacks in most markets globally (IOSCO, 2004). Australia is no exception. The legal requirements of share buybacks in Australia are currently contained in the Corporations Act 2001, and company conduct during the repurchase is constrained by ASX Listing Rules 3.8A, 7.29 and ASX Listing Rule 3.8A governs the requirements for companies to make an initial announcement, a final announcement and also notify any changes to buyback parameters during the repurchase period. Company compliance with disclosure requirements for the initial announcement of an onmarket buyback has been found to be reasonable, but is poor for final buyback notices (Holub and Mitchell, 2012). Despite good disclosure when the firm announces its intention to repurchase shares, selling shareholders may still be completely unaware that the opposite party to the transaction is the company. In addition to the disclosure requirements, a number of ASX Listing Rules govern company behaviour in the market during the buyback period. The objective of these rules is to protect creditors and shareholders and ensure that companies undertaking buybacks are not putting their solvency at risk, are treating shareholders equitably and are disclosing all relevant information to the market. Australia provides a unique environment to study company compliance with the Listing Rules because companies must disclose on a daily basis any previous day s repurchasing activities. The first objective of this paper is to document in detail the on-market buyback activity of Australian companies from 1997 to The second and important objective is to investigate the extent to which companies comply with the prescribed listing rules governing company behaviour

5 5 during the on-market repurchase period. The first rule (Listing Rule 7.29 the minimum trading rule) stipulates that a company can repurchase shares only if there has been at least five days of positive trading volume in the three months prior to the date of repurchase. The second rule (Listing Rule 7.33 the maximum price rule) provides that the company may buy back shares onmarket at a price which is no greater than 5% above the average of the closing prices over the previous five days on which trading occurred in the company s shares. We use data provided by companies daily reporting of buyback activity to investigate company compliance with these two listing rules. We find high compliance rates with both Listing Rule 7.29 and Listing Rule Of the 38,541 observations of company daily reports the compliance rate for Listing Rule 7.29 is 99.8 percent and that for Listing Rule 7.33 is 98.9 percent. Listing Rule 7.33 protects the market against the company creating artificially high prices for the shares. This is in the interest of market integrity, efficient prices and reduces the need for regulatory oversight of company transactions. However, companies are not as diligent in reporting their activities within the required time limits. We find only 69 percent of companies have reported their activities within half an hour of the market opening on the next business day, as required. However, by the end of the trading day 90 percent of companies have reported their previous day s buyback activity. The remainder of this paper is organised as follows. Section 2 provides a summary of the regulation of on-market share buybacks in Australia and includes relevant comparisons to regulation in other countries. Section 3 provides information on the data examined while Section 4 presents our findings. Section 5 concludes the paper. 2. Regulation of on-market buybacks 2.1 Regulations around the globe On-market buybacks have become an important mechanism for cash distribution and capital structure management around the world. Managers implementing buyback programs on-market are insiders and may therefore have information that selling shareholders do not have access to. Consequently in most jurisdictions repurchase activities of companies are regulated. Kim et al, (2004) and IOSCO (2004) compare repurchase regulations across a number of countries. Generally regulations include rules regarding whether permission must be sought at a

6 6 shareholder s meeting, whether there is a time limit on the expiration date once approval is given, whether there is a limit on the percentage of shares outstanding that can be bought under the buyback, any timing restrictions on actual trading by the company, public disclosure rules, and whether there are restrictions on the company repurchasing shares during information-sensitive events such as earnings announcements. The specific nature of the regulations varies from country to country. In the U.S., SEC Rule 10b-18 as enacted in 1982 provided an issuer with a safe harbor from liability for manipulation under the Securities Exchange Act of Up until 2004 US firms could undertake a repurchase without prior announcement and could announce a repurchase and not buy back any shares. Overcoming the lack of publicly available data, Cook, Krigman and Leach (2003) conduct a survey of repurchasing companies and find that only 2 out of 54 firms were in compliance with all of the Rule 10b-18 guidelines. In December 2003 the SEC adopted amendments to the rules governing repurchases and required companies to disclose all repurchases. The new disclosure rules require companies to disclose their repurchase activity quarterly. 5 In France, Canada, Japan and Italy companies are required to report their repurchase activity on a monthly basis (IOSCO, 2004). Ginglinger and Hamon (2009) examine a sample of 806 repurchase programs on the Paris Stock Exchange over 2000 to Companies are constrained by regulations to purchase no more than 25 percent of the trading volume on any trading day and must not trade in the period 15 days before an earnings announcement. They find that the smallest and least liquid firms frequently violate the volume rule, and 70 percent of companies in the sample repurchased shares at least once in the prohibited trading window prior to earnings announcements. Companies buying shares in the prohibited period before earnings announcements had the most detrimental effect on selling shareholders. The legal and regulatory environment in Hong Kong most closely resembles that of Australia. Onmarket repurchases are restricted to less than 10 percent of shares outstanding at the time approval is given and in any given month the company can buy back no more than 25% of the volume recorded for the previous month. Companies are prohibited from buying back shares during 5 Under the amendments, issuers are required to disclose, among other things, the total number of shares repurchased during the past quarter, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase plan, and the maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs.

7 7 information-sensitive events, at least until that information is made public. The Hong Kong Stock Exchange requires companies to disclose on a daily basis (and prior to the start of trade on the next business day) details of the company s repurchase activities for the previous day. The exchange then aggregates the daily data and releases the information to data vendors, who release the information at or around the start of trading (Brockman and Chung, 2001). 2.2 The Australian regulatory environment The legal requirements of share buybacks in Australia are currently contained in the Corporations Act 2001, and company conduct during an on-market repurchase is governed by ASX Listing Rules 3.8A, 7.29 and The consequences of this legal framework can be summarised as follows. A company may buy back up to 10% of its voting shares in any 12 month period without seeking shareholder approval. This is referred to as the 10/12 limit, and is defined in sections 257B(4) and 257B(5) of the Corporations Act A buy back is an on-market buy back if it results from an offer made by a listed corporation in the ordinary course of trading on a prescribed financial market (s257b(6)). The disclosure regime in Australia for companies undertaking an on-market buyback is transparent, enabling a comprehensive study of compliance with the regulatory framework. Companies must lodge a Form 281 ( Notice of intention to carry out a share buyback ) with the Australian Securities and Investment Commission (ASIC) at least 14 days before the commencement of the buyback. Companies must publicly announce an on-market buyback and they are required to lodge an announcement notice (called an Appendix 3C) with the ASX. Included in the announcement notice is the name of the broker (or joint brokers) who will act for the company. A company must not dispose of shares it buys back and the shares are automatically cancelled when the transfer to the company is registered. (s257h(2), s257h(3)). In addition ASIC must be notified of the cancellation of shares using Form 484 Change to company details. 6 Any changes to the buyback, including for example a change of broker, must be notified to the ASX through the lodgement of an Appendix 3D form. 6 Under Section 254Y of The Corporations Act a company must lodge a notice detailing the number of shares cancelled, the total amount paid by the company and the class of shares cancelled, with ASIC within one month of the cancellation of the shares. The company must lodge the notice with the ASX at the same time as it lodges the information with ASIC. Any changes to the original terms of the buyback are notified using Appendix 3D.

8 8 Australian regulation is similar to that in Hong Kong (Brockman and Chung, 2001) in that the continuous disclosure requirements imply that companies must make a daily statement to the ASX of any buyback activity on the previous day. Under Listing Rule 3.8A a company undertaking an on-market buyback must lodge a daily notification (called an Appendix 3E) at least half an hour before the start of trading on the business day after which any shares are repurchased. Companies may repurchase shares only if transactions in the company s shares were recorded on the ASX at least 5 days in the three months before it repurchases the shares (Listing Rule 7.29, the minimum trading rule ). Another important feature of this disclosure environment is ASX Listing Rule 7.33, the maximum price rule rule, pursuant to which a company may only buy back shares under an on-market buy-back at a price which is not more than 5% above the average of the closing market price for securities in that class, where the average is calculated over the last 5 days on which sales in the shares were recorded before the day on which the purchase under the buyback was made. 7 See the Appendix for a full statement of these Listing Rules. Companies are now required to use the ASX on-line portal for electronic lodgement of the required documents. The market announcement team reviews the document, classifies the announcement and then it is released to the market usually within a minute of its arrival in the portal. The responsibility for ensuring that ASX has adequate arrangements for monitoring and enforcing compliance with the Listing Rules resides primarily with the Listings Unit in ASX Compliance. The compliance team follows up with an entity if it does not provide timely lodgement of required documents. However, the Listing Rules are not law and the sanctions available to the ASX for an entity that breaches the Listing Rules are suspension of trading in its securities or the ultimate sanction of termination of its listing on the ASX. One explanation of a company s motivation for repurchasing shares is the information/signalling hypothesis with its roots in the information asymmetries that exist between managers and outsiders. Managers can use a repurchase announcement to signal to the market that its shares are undervalued. The positive abnormal returns observed on announcement of a buyback (Dann (1981), Vermaelen (1981), Comment and Jarrell (1991), and Peyer and Vermaelen, (2009) in the U.S. and Lamba and Ramsay (2005) and Mitchell and Dharmawan (2007) in Australia) are generally viewed as consistent with this hypothesis. 7 Note that a volume-weighted average price version of this rule was introduced in July 2014, but does not affect our sample.

9 9 Of course, once the market has reacted to the announcement and the share price has adjusted to the new information, then the company can repurchase the shares at a price below the fair market price only if it can time the market (Rau and Vermaelen, 2002; Brockman and Chung, 2001). An efficient market may respond instantaneously to the announcement of a buyback, making the purchase of undervalued shares a difficult investment strategy for the company. But in many cases on-market buybacks continue over an extended time period, and the company, as an insider, may use the opportunity to manipulate the share price. Although under the ASX Listing Rules buybacks may be of unlimited duration, under ASIC Regulatory Guide 110 (enacted in July 2007) the company must announce a start- and end-date for the on-market buyback. The company can repurchase shares for up to 12 months; after 12 months a fresh notice is required (ASIC Regulatory Guide 110 RG to ). The company must commence repurchasing shares within two months of the announcement or a new announcement with accompanying required documents is required (ASIC Regulatory Guide 110 RG to ). Holub and Mitchell (2012) provide a comprehensive overview of the history of the Corporations Law and the ASX Listing Rules pertaining to on-market buybacks. They find reasonable compliance with the disclosure requirements for the initial announcement of an on-market buyback, but disclosure in the appropriate ASX notice is provided in only 53 percent of cases for the final notice. However the announcement of a buyback does not provide information to the market of when the company is actually buying back its shares; in fact uninformed selling shareholders may be completely unaware of the possibility that the company is the opposite party to the transaction as the announcement of the buyback could have occurred sometime before. Holub and Mitchell (2012) suggest that the continuous disclosure requirements embedded in the adherence to Listing Rule 3.8A are unnecessary and recommend policy changes to lessen those disclosure requirements to quarterly, more in line with regulations in the U.S. We take a contrary position and argue that the continuous disclosure requirements provide substantial protection to investors and enhance market integrity during the conduct of the buyback. One role of the exchange is to provide information to the market, and the ASX expends considerable resources ensuring compliance with its rules and the timely release of continuous disclosure information. In this capacity daily notifications are useful to market participants wanting to know company buyback activities once the buyback has been announced. Specifically, because on-market buybacks may give rise to price distortions when the company is actively

10 10 purchasing, more frequent disclosure by the company is better. Shareholders selling into such buybacks are at a substantial information disadvantage which may allow the company to exploit them in favour of the remaining (or non-selling) shareholders. Although on-market buybacks have become an important mechanism in Australia for some companies to return cash to shareholders, 8 and have the potential to affect the orderliness and integrity of the market, there have been no studies investigating whether companies actually comply with the continuous disclosure requirements (Listing Rule 3.8A). As well as investigating company compliance with the continuous disclosure rules we examine company compliance with Listing Rules 7.29 and Listing Rule 7.29 requires that repurchasing companies must have positive trading volumes (on exchange) before they can commence a buyback. This provides some assurance to shareholders that they will be selling at market prices when the company is the opposite party to the transaction. The main intention of the maximum price rule (Listing Rule 7.33) is to protect investors because it restricts companies from using share buybacks as a means to artificially inflate share prices. While companies may wish to provide liquidity in periods of selling pressure, they may do so only at prices that satisfy this rule. A significant development in global equity markets, including Australia, has been a growing awareness of the importance of off-market trading. A relatively large percentage of trades in shares, including smaller trades, occur off-market in so-called dark pools (estimated to be around 25 percent in Australia (ASIC, 2013). Around 20 broker-operated crossing-systems are registered with the market regulator ASIC. The outcome of off-market trading is a lack of pre-trade transparency, because these trades are arranged outside the limit order book. The effect for larger block trades is to make the market more efficient, but these off-market trades harm the price discovery process for smaller trades (Comerton-Forde and Putnins, 2013). However, ASX Market Rule (introduced 28/11/05) prohibits special crossings of any cash market products of an issuer during the term of an on-market buyback conducted by the issuer, implying that the company and all other investors must transact in the shares on-market during the duration of the buyback, thus protecting pre-trade transparency during the period where the company is potentially in the market trading its own shares. 8 Brown, Handley and O Day report that the cash distributed by companies repurchasing shares over the period 1996 to 2009 via both on-and off-market repurchases is comparable to that distributed via dividends, but that only a small percentage of listed companies are active repurchasers.

11 11 3. Data and sample statistics We use data from several sources to construct a comprehensive database for all ASX repurchases beginning in 1997 and continuing until December The Morningstar DatAnalysis Imagesignal service is used to identify all initial buyback announcements. We use the announcements file of the Securities Industry Research Centre of Asia-Pacific (SIRCA) to extract information from company announcements for all on-market buybacks over the period 1997 to The SIRCA announcement files are in both pdf and text format. The information in the text files enables construction of a database with details for every daily announcement provided by companies undertaking on-market repurchases over the period from 1997 to The ASX daily trade data used for this study is sourced from SIRCA. We are interested only in repurchases of ordinary shares by Australian (domestic) companies listed on the ASX. Our sample therefore differs from that of Holub and Mitchell (2012) who investigate buybacks for both domestic and foreign companies listed on the ASX over 2000 to The lodgement of the Appendix 3E form (described in Section 2.2 above) is used to document for each announcing company the days on which the company was present in the market buying back ordinary shares. Included in the record of the company s daily notification to the stock exchange of repurchasing activity are details of the time at which the Appendix 3E form is lodged. The company supplies information including the number of shares bought back, the total consideration paid for the shares, the highest, lowest and average prices paid for the shares during the day and the company s own calculation of the maximum price allowed under Listing Rule We manually check the integrity of the individual entries in the database that is built up from these daily notifications. We are able to build a running tally of shares repurchased throughout the buyback period using this information, and also to ensure that the tallies are internally consistent for each company. At the expiration of each buyback, the total of all shares repurchased calculated from the daily notices must match the final buyback notice. 10 In this way we are confident of the integrity of the data because we are able to correct any obvious data entry mistakes that the company has made when filling out the Appendix 3E form. Whilst all the data are available electronically, the data has been painstakingly manually checked. Table 1 contains a summary of the filtering rules applied and provides labels for the various 9 We use actual repurchases; companies announcing repurchases which do not subsequently repurchase are not included in the sample. 10 We check against the Appendix 3F if that has been lodged.

12 12 samples used later in this study. Company supplied information on shares repurchased is matched in the first instance by volume and price. There are observations where an Appendix 3E has been lodged but which cannot be matched to a purchase date. In addition, there are observations where a company reports data that could not be matched with volumes recorded in SIRCA for a particular date. For example, there are instances where the company reports a number of shares bought back that is greater than the total volume for the day, and in addition that cannot be matched with any other day around that date. In these cases the observation is placed in the unmatched sample. In total there are 56 observations in the unmatched sample, including 10 off-market trades. There are 216 observations where no Appendix 3E was lodged, but where the buybacks can be manually matched to a purchase date. As documented in Table 1 Sample 1 is the raw data sample and consists of 38,541 daily observations representing all buyback activity from 1997 to Sample 2 consolidates multiple records where the buyback number and purchase date are the same and consists of 38,253 observations. Sample 3 has the unmatched observations removed and any duplicate reports of shares bought back for the same date are consolidated and consists of 38,194 observations. [Insert Table 1 around here] Figure 1 plots the total dollar value of shares repurchased through on-market buybacks for each calendar year over the sample period (left-hand axis) and the number of repurchase programs announced each calendar year (right-hand axis). There are a couple of preliminary observations from Figure 1 that will be explored in more detail in sub-sample analysis in Section 4. The number of repurchase programs reached a peak in 2008; however the dollar value peaked earlier in Although the Australian economy emerged from the liquidity and credit crunch of (Brunnermeier, 2009) relatively unscathed, there was a substantial correction in the equity market. The Australian share market peaked in November 2007 and by the end of December 2008 had dropped around 45 percent. The drop in the dollar value of shares repurchased from 2007 ($5,886m) to 2008 ($1,763m) partly reflects the devaluation in the equity market. Casual observation of the number of the number of on-market buybacks in 2008 suggests that companies may have been opportunistically repurchasing undervalued shares in 2008, or that they were engaging in price support to a greater extent than in other periods. Such an observation is consistent with survey results of Graham, Harvey and Michaely (2005) in which financial executives state that they repurchase when the shares represent good value relative to fundamental or true value.

13 13 [Insert Figure 1 around here] Table 2 records the summary statistics of the on-market repurchasing activity, and contains the statistics for the 993 buybacks in the sample (labelled the summary sample in Table 1). As shown in Table 2 and also in Figure 1 the number and value of repurchases varies considerably over the sample period. Table 2 gives details of the number of buybacks announced in each calendar year (column 2) and the number of unique companies announcing buybacks each calendar year (column 3). In column 4 the number of buybacks active in each calendar year are reported while the number of unique companies actively buying back each calendar year is recorded in column 5. Because buybacks can straddle calendar years, and because companies may announce a repurchase in one calendar year and not commence until the following year, the entries in Column 2 may be equal to or greater or less than those in column 4. Column 6 (7) records the average (median) length in trading days of buybacks over each calendar year and column 8 (9) records the average (median) shares repurchased as a percentage of shares outstanding. The last column records the total consideration paid for repurchases over each calendar year. [Insert Table 2 around here] The average number of shares repurchased as a percentage of the total shares outstanding reported in Table 2 is similar to that reported by Holub and Mitchell (2012) for ordinary shares repurchased by domestic companies. The mean percentage of shares repurchased is 3.44 percent for the sample. To get some sense of the distribution of repurchases we split the sample into the top, middle and bottom one-third in terms of the dollar size of the buyback. Figure 2 shows the distribution for each tercile of 331 observations. Figure 2A gives the distribution of the largest buybacks with consideration paid ranging from a low of $5.04m to a high of $2,813m, with almost 100 buybacks with consideration between $5m and $10m. In this category there are 7 buybacks which have repurchase amounts greater than $1b. Figure 2B contains the distribution for buybacks with consideration between $0.647m and $4.993m. Figure 2C gives the distribution of small buybacks with consideration from a low of $441 to a maximum of $0.647m, and illustrates the fact that there are a large number of very small buybacks. [Insert Figure 2 around here]

14 14 Summarising the on-market repurchasing activities of the companies in the sample, the typical repurchasing firm enters the market on around 39 days with each repurchase, buying back over the entire repurchase period around 8.3 million shares or on average 3.4 percent of outstanding shares for total consideration on average of approximately $39 million. Almost 20 percent of the sample firms repurchase five or fewer times during the buyback, while almost 25 percent of the sample firms repurchase more than 50 times during the course of the buyback. Figure 3A gives the distribution of the number of days on which the firm is actively repurchasing shares in each buyback. The continuous disclosure regime requires companies to lodge the Appendix 3E notification half an hour before the open of trade on the next business day. Our argument that this increases market integrity has greater credence if the daily lodgement actually sends a credible signal to the market regarding company presence in the market. To investigate this we calculate the gap (number of trading days) between dates on which the company is present in the market actively buying shares. Using Sample 3 (38,194 observations) there are 25,176 observations where the company is in the market on two successive trading days. This implies that when a company reports its activity on the next business day there is a 67 percent 11 chance of it repurchasing shares on the day that it lodges the Appendix 3E. 4. Empirical results and discussion The institutional framework in which Australian companies undertake on-market buybacks provides a very transparent regime and after careful manual compilation of the data, results in a database that enables a thorough investigation of the extent to which companies adhere to the ASX Listing Rules. The primary purpose of this study is to use this dataset to examine whether Australian companies are complying with the regulations. We therefore perform this analysis on the full data set, Sample 1, because the filtering process identified in Table 1 removes some of the non-compliant observations, which need to be counted in our statistics for non-compliance. For all 993 identifiable buybacks we first check compliance with the lodgement of Appendix 3C and 3F forms, required under Listing Rule 3.8A, which respectively signal the start and close of the buyback to the market. The compliance rate with lodging Appendix 3C (3F) is 98.6 percent 11 There are 38,194 observations in sample 3, with 993 of these the first date on which the company purchases. There are thus 37,201 observations of the gap between active purchasing days.

15 15 (65.6 percent). These figures compare with those reported by Holub and Mitchell (2012) of 98 percent and 53 percent respectively over the period 2000 to From 1 st September 1999, when the new set of ASX Appendices 3C, 3D, 3E, 3F replaced the old Appendices 7C, 7D, 7E and 7F, on-markets buybacks have been allowed to be of unlimited duration. 12 Under the new rules the Appendix 3F should be lodged when the company has bought back the maximum number of shares it wanted, or if it decides it will stop buying back shares (see the Appendix). Of the 993 buybacks in the sample there are 342 (around 34 percent of the total) instances where the company did not lodge an Appendix 3F; Figure 4A plots the distribution of active repurchase days for these buybacks, while Figure 4B plots the distribution for companies that are compliant with lodging the final notice. There does not appear to be any apparent reason in terms of the length of the buyback as to why companies fail to lodge the final notice. It may simply be that companies have not conclusively decided that the buyback has ended and therefore do not lodge the final notice. We next investigate whether companies comply with Listing Rule 3.8A which requires them to lodge Appendix 3E at least thirty minutes before the start of trade on the next business day after the date of any repurchase activity. Trading on the ASX starts at am. Table 3 reports the results of these tests. Using the time of lodgement of Appendix 3E we find 12,068 breaches for the full sample, reflecting the number of lodgements of Appendix 3E that occur after 9.30am on the business day immediately after the company trades occurred. Of these, 7887 have not been lodged by am, 5361 have not been lodged by midday and 3914 have still not been lodged by the end of the day. For the full sample, of the 38,541 lodgements of Appendix 3E 68.7 percent comply with Listing Rule 3.8A by occurring at least 30 minutes before the start of trade on the next business day. For large (small) companies this figure is 71.1 (54.0) percent. 13 [Insert Table 3 around here] There is no discernible pattern in the compliance rates over time. Companies execute their purchases through one or two designated brokers; brokers are identified in the Appendix 3C form. The broker s executed trades are notified to the company typically at the end of the trading day and then the company must lodge through the ASX on-line portal the details of the day s repurchases. Unless the broker has the authority to lodge the Appendix 3E (which does not appear to be the case for most companies), there is a delay between the actual trades and the company 12 Although as previously noted ASIC requires companies to lodge a form to extend the buyback after 12 months. 13 We split the sample into large (small) firms where the size of the firm is greater (smaller) than the median market capitalisation for all firms listed on the ASX in the month prior to the announcement of the buyback. Tests of compliance are run on the large and small firm sample separately, but are not tabulated.

16 16 being notified of the details of the trades. Hence to lodge the details of the trades 30 minutes before the start of trade on the next business day as required under Listing Rule 3.8A will be difficult if the broker does not report the trades to the company in a timely fashion. It is arguably more difficult for smaller companies to comply because they may not necessarily have dedicated treasury staff to lodge the Appendix 3E forms. We integrate the daily repurchasing activity with daily closing prices for all repurchasing companies on all trading days over the period of each buyback, and for a period three months before the announcement date of the buyback. Daily volume data three months prior to the day on which each company repurchases shares is used to document breaches of Listing Rule Recall that in order to buy back shares on-market a company must have had five days in the previous 3 months in which trading in the company shares occurred. Therefore the filter we apply is to select the date three months prior to the date that the company first buys back shares, and record the number of days of positive volumes. It is clear that in the context of Listing Rule 7.29 it is particularly important that the company complies with Rule 7.29 the first time it repurchases shares for an announced buyback, because the potential for creating an artificially inflated price through the company s actions is greater if this condition does not hold. For this analysis we use Sample 3 consisting of 38,194 daily observations and find 66 breaches of Listing Rule 7.29 as documented in Table 4. The compliance rate with this listing rule is very high (99.8 percent), and is not unexpected as the compliance hurdle is low. As would be expected, small companies are more likely to be in breach of this listing rule. [Insert Table 4 around here] The intention of Listing Rule 7.33 is to prevent companies from artificially inflating share prices through transacting at prices above fundamental value or providing price support at unrealistic prices in a falling market. The sample period in this study includes the downturn in the Australian equity market as a result of the liquidity and credit crunch. From the All Ordinaries Index daily price series we identify 1 st November 2007 as a high point of the market (Index Value = ) and 23 rd January 2009 as a low point (3300.3). Using daily prices we calculate the price which is equal to the average of the recorded closing prices over the previous five days on which sales are recorded plus 5% - the maximum price designated in ASX Listing Rule To make this explicit let this price be designated as M. Then M = 1.05 (Averageof last 5day's (on which sales are recorded) closing prices)

17 17 The company does not report the actual prices at which it buys back shares, rather the low, high, and average price at which it repurchased shares each day are reported on the Appendix 3E form. We designate these low and high prices as Plow and Phigh. The company also records on Appendix 3E its calculation of M which we label Mco. However there are 4690 of the 38,541 (12.2 percent) Appendix 3E reports where the company does not record a calculated maximum price. In Table 4 we calculate the average percentage difference between M and Mco for the 33,852 Appendix 3E reports that record the company s calculation of the maximum price. We first compare M and Mco to check for breaches of Listing Rule If Plow > M then clearly the company is in breach of Listing Rule 7.33 for all purchases on that day. If Phigh >M then the company has breached Rule 7.33 for a portion of the transactions on that day. We also calculate the extent of the maximum breach by calculating the percentage difference between the two prices where a breach has occurred:100*(m Phigh)/M. Table 5 documents the results of this investigation. Panel A presents the results for the full sample. [Insert Table 5 around here] Of the 38,194 daily reports there are 4690 days (12%) on which the company does not report its calculation of the maximum price (Mco), and 237 days (0.6%) where Phigh is not reported. There are 326 days where both the maximum price and Phigh are not reported. This provides evidence of occasions where the company submits the Appendix 3E report without filling out the requested prices. As reported in Table 5 Panel A, 5.5 (0.88) percent of the remaining observations have a reported maximum price that is at least 1 (5) percent above the maximum calculated from actual closing prices. This may not have material consequences if companies buy back shares well below their stated bound, Mco. Of more importance are the violations of the maximum price rule calculated using the true value of M. Companies are not fully compliant on the Appendix 3E forms with stating the value of Phigh, there are 237 instances where the Appendix 3E form does not record this price. In addition, there are 415 reports where Phigh > M. In other words of the 38,304 usable daily reports only 1.1 percent of the reports contain days where one or more repurchase trades by the company have occurred at a price that violates Listing Rule The violations are not economically significant, as Table 5 Panel A shows that half of these violations (0.54% in total) occur within 1 percent of the required price. That companies might use on-market repurchases to provide liquidity in severe market downturns has been noted by Cook, Krigman and Leach (2003). Companies can absorb sell-side pressure to support a falling stock price through their purchases. Such purchases will be unlikely to violate

18 18 the maximum price rule in a downward trending market. In order to investigate whether there is greater price support provided during the downturn in the market resulting from the liquidity and credit crunch of we investigate the violations of Listing Rule 7.33 that occurred between November 1 st 2007 and 23 rd January 2009, the high and low points of the Australian equity market. Table 5 Panel B shows that there are 4917 daily reports during this period, of which 4,886 have Phigh recorded. There are 70 (1.4%) where Phigh > M and 0.84% of trades occur at prices that violate the maximum price rule by more than 1 percent. We report in Panel C that for the non-crisis period (before 1 st November 2007 and after 23 rd January 2009) there are 0.50% of trades occurring at prices that violate the maximum price rule by more than 1 percent. Notwithstanding that the violations are a small percentage of trades and do not appear to be economically significant, the percentage of violations that are greater than 1 percent of the maximum price during the crisis is 67 percent higher than the non-crisis period. Using a binomial test, the frequency of violations in the crisis period greater than 1 percent is statistically significantly different from the non-crisis period at a one percent level of significance, as shown in Table Conclusions On-market repurchases by Australian companies occur in a transparent environment where companies are required to lodge documents announcing the commencement of the repurchase program, the closure of the program, and all buyback activity must be notified to the ASX at least half an hour before the open of trade in the next business day. This rich information environment facilitates the collection of a dataset of 38,541 daily observations with which to investigate company compliance with the regulatory requirements. Our findings are as follows. While over 98 percent of firms comply with the requirement to lodge the Appendix 3C form announcing the firm s intention to repurchase shares, only around 66 percent comply with lodging the Appendix 3F form which announces the closure of the buyback to the market. Moreover only around 69 percent of observations comply with the requirement (Appendix 3E) to disclose any repurchase activity 30 minutes before the start of trade on the next business day. The inevitable delays between being notified by the firm s broker of trades occurring on the company s behalf and then reporting to the ASX may be a logistic reason for the delay in lodging daily reports. However, we can think of no reason for companies not reporting the closure of the buyback, other than speculation that the company s purchases may just peter out and there is no explicit acknowledgement that the buyback activity has officially stopped.

19 19 Listing Rules 7.29 and 7.33 provide minimum activity and price rules respectively to protect market integrity and maintain an orderly market. It is reassuring to note that repurchasing companies are almost 100 percent compliant with the two listing rules. Rule 7.29 requires there to be positive volumes on at least 5 days in the three months prior to the company repurchasing. Companies are 99.8 percent compliant with this rule. Rule 7.33 sets a maximum price at which companies can transact, to prevent companies from artificially inflating share prices. Over the whole sample period companies are just under 99 percent compliant with Listing Rule Where there are breaches their economic significance is small with 0.54% of observations being in breach of the maximum price rule by less than one percent. There is evidence from our analysis that repurchasing companies provided more price support in the crisis period of , with breaches of the maximum price rule by more than one percent increasing by 67 percent. Australia offers a regulatory environment for on-market buyback reporting that is far more transparent than most jurisdictions around the globe. This paper is the first to thoroughly investigate company compliance in a regime where companies are required to report daily any onmarket repurchase activity. We have documented a very high level of compliance with the ASX Listing Rules designed to protect the market and maintain both its orderliness and integrity. This is reassuring and in line with our view that the daily reporting requirements of on-market buyback activity are of economic benefit. Further research is needed to explore the extent to which companies can time the market to the detriment of selling shareholders. Also, in Australia, unlike in many other markets, there are no restrictions on companies with respect to purchasing shares around price-sensitive events such as earnings announcements. Whether companies are using private information to trade to their own advantage around these events is not investigated in this paper, but could be another fruitful line of research in the future.

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