Determinants of share returns following repurchase announcements in China

Christopher Gan,David A Cohen,Damon Wu,Chao Bian

doi:10.21511/imfi.14(2).2017.01

Christopher Gan, David A Cohen + Show 2 more

Open Access

https://doi.org/10.21511/imfi.14(2).2017.01

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Abstract

By combining the market model with the three-factor model, this study investigates firms’ share returns after the announcement of share repurchase. Employing data for China’s A-share market, this study’s sample utilizes 417 share repurchase announcements over the period of 2000 to 2012. Empirical results show that firms with higher sales growth rates are more likely to send a positive signal to the market through their share repurchase efforts. Analysis also shows that the higher a firm’s price-to-earnings ratio (utilized as a measure of overvaluation), the lower the firm’s cumulative abnormal returns. These results imply that Chinese share markets put more emphasis on the firm’s future growth and share overvaluation.

Highlights

Previous studies have discovered that share repurchases typically lead to an increase in share prices (Vermaelen, 1981; Choi, 1997; Stephens & Weisbach, 1998; Born et al, 2004) and improvement in firms’ operating performance (Nohel & Tarhan, 1998; Lamba & Luan, 2004)
The median CARs (-0.013) for our Table 4 shows the CARs remain positive with sample suggests that on average, the Chinese public the event window during the repurchase anfirm cumulative abnormal returns decrease by 1.3% nouncement (-20, 20) period we focused upon. during the 20 days before and 20 days after the share The CARs under the symmetrical conditions repurchase agreement
Consistent with Ho et al (1997), the results presented in Table 5 show that high levels of sales growth rates lead to higher CARs across columns (1) to (3)

Summary

Introduction

Previous studies have discovered that share repurchases typically lead to an increase in share prices (Vermaelen, 1981; Choi, 1997; Stephens & Weisbach, 1998; Born et al, 2004) and improvement in firms’ operating performance (Nohel & Tarhan, 1998; Lamba & Luan, 2004). Repurchasing shares through debt financing could increase the firm’s leverage and optimize its capital structure. This could result in the maximization of the firm’s intrinsic value. A securities buyback could convey information that might change investors’ expectations of the firm’s performance and lead to an increase in share price (Dittmar, 2000). One important motivation of Chinese firms’ share repurchases is likely to be the segregation of state-held shares from privatelyheld ones. When firms buy back shares from SOE shareholders, government ownership decreases. As the government ownership shrinks through share repurchase, the inefficiency of the firm’s performance that results from the government’s blockholding and potential intervention may decrease. Investors may view share repurchase as a positive signal, with the firm’s abnormal share returns more likely to increase

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