An examination of open market stock repurchases: cash flow signalling, investments, and Tobin's Q

Abstract

This paper examines the information content of repeat open market repurchase announcements, the impact of investments and R&D expenditures on the stock repurchase induced returns, and the competitiveness of firms involved in repeat repurchases. We test the proposition that the market reaction to announcements of repeat repurchases is different from that to first-stage repurchases. First-stage repurchase announcements convey positive information regarding a firm's future prospects. Because of pooling information across different quality firms, however, only repeat repurchase announcements may distinguish firms according to their true cash flow potential. Results supporting the cash flow signalling hypothesis indicate that the valuation effect of open market repurchases is positive across cohorts of repurchase announcements, independent of the firm's investment and R&D level, and that firms with repeat repurchases do not decline in competitiveness measured by Tobin's Q.