Abstract
This study examines various aspects of open market share buybacks using data from Hong Kong. One advantage of using data from Hong Kong is that details of actual share repurchases are disclosed. Our results suggest that firms initiating share repurchases have surplus cash and are undervalued. Furthermore, the number of shares repurchased in a quarter is a function of the cash flow of the firm, undervaluation and the number of shares repurchased in the prior period. We find that market-adjusted stock returns surrounding the first share repurchase are a function of undervaluation, as proxied by prior abnormal stock returns, and the number of shares acquired. The general tenor of the results is consistent with the hypotheses that managers engage in share buybacks to return ‘surplus’ cash to shareholders and to signal and correct undervaluation.
Published Version
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