The Role of Managerial Discretion in Agency Problems and Stock Repurchase Decisions in China

Abstract

This study examines the relationship between managerial discretion, agency problems, and stock repurchase decisions in Chinese publicly listed firms between 2011 and 2021. Using data from over 1,000 companies listed on the Shanghai and Shenzhen stock exchanges, this research employs Structural Equation Modelling (SEM) and regression analysis to test the impact of managerial discretion on agency problems and its subsequent effect on stock repurchase behavior. The findings reveal that higher levels of managerial discretion are positively associated with increased agency problems, supporting agency theory’s premise that managers may prioritize personal interests over those of shareholders. Furthermore, agency problems mediate the relationship between managerial discretion and stock repurchase decisions, with firms facing higher agency costs more likely to engage in repurchases as a means of managing these conflicts. The study also highlights the influence of ownership structure, finding that state-owned enterprises (SOEs) exhibit lower levels of managerial discretion and are less likely to engage in stock repurchase programs compared to privately owned enterprises (POEs). Lastly, event study methodology shows that stock repurchase announcements lead to positive market reactions, suggesting that repurchases are seen as a signal of financial strength. This research contributes to the understanding of corporate governance in China, offering insights into how managerial discretion and ownership structures influence financial decision-making. The study has implications for both corporate executives and investors, highlighting the importance of governance mechanisms in aligning managerial actions with shareholder interests. Future research directions are also discussed, including the potential for longitudinal studies and comparative research across different emerging markets.