Buybacks Around the World

Abstract

This paper documents that short-term returns around share repurchase announcements and long-run abnormal returns afterwards are following the same pattern in non-US firms as document by prior literature for U.S. firms. We test whether cross-country differences in corporate governance quality and regulatory differences can explain variation in the short- and long-run abnormal returns. We find positive announcement returns around the world, higher in better governed countries and firms, and where regulation allows the board rather than the shareholders to approve a buyback announcement. Long-run abnormal returns are also observed globally and they are related to an undervaluation index (Peyer and Vermaelen, 2009, RFS) consistent with the interpretation that managers are able to time the market by buying back their own shares at low prices. Governance quality is also related to returns. Firms with lower governance ratings outperform those with higher ratings in the long run consistent with the buyback signalling lower agency problems than expected by the market. Furthermore, long run abnormal returns are higher in board approval countries suggesting that board approval regimes make managers act more in the interest of long-term shareholders rather than using buybacks to manipulate share prices.