An Alternative Explanation for Stock Price Increases among the S&P 500 following a Stock Buyback Announcement

Abstract

Purpose: The purpose of this paper is to investigate an alternative, more basic explanation for stock price increases among the Standard & Poor's 500 Index following a stock buyback announcement than the signaling theory offered in current literature.
 Methodology: Three related sets of data were collected and analyzed for 1,858 individual S&P 500 stock buyback announcements occurring during the period 2005-2015: First, the actual stock prices for 6 different times from the buyback announcement date (t) to one year after (t+365); second, the S&P 500 Index for the same dates; and third, the mathematical price of the stock resulting from the reduction in buyback shares.
 Results: The results demonstrate that the greatest contributor to the post-buyback-announcement share price increase is due to the combination of general market moves (S&P 500 Index) and the mathematical reduction in shares occurring from the buyback. No support is found for the signaling theory.
 Implication: This research presents a conceptually yet empirically supported framework to describe the significance of the mathematical reduction in shares as a contributing factor in the post-buyback-announcement share price increase as compared to alternatives offered in the current literature. This paper is particularly useful for those who study stock market behavior and the causes of the share price increase that follow a stock buyback announcement.