Does the credibility of open market share repurchase matter?

Abstract

Previous studies indicate that stock prices react positively to announcements of open market share repurchases (OMR). However, global evidence indicates that some firms announce OMR programs without repurchasing shares. Kracher and Johnson (1997) define such firms as guilty of poor credibility firms. This study investigates whether credibility measurements are associated with market responses using a sample of OMR announcements from 2001 to 2021. Benefitting from the complete information disclosure in Taiwan, an accurate completion rate and cost location variables are adopted to measure a firm's credibility. The results show that the proxy of credibility, i.e., the product of the completion rate and the cost location, positively affect market responses. In addition, a probit model is utilized to predict which firm-specific characteristics lead to high credibility. The findings reveal that firms with low market-to-book ratios, low return volatility, high insider ownership, good firm performance, low dividend yield, and are classified as electronics industry have a high probability of conveying credible signals to investors. Overall, the paper supports the existence of credibility effect and suggests that firms should value their credibility.