Abstract
Since the “Control and Transparency in Business Act” (KonTraG) came into effect on 1 May 1998, German firms are permitted to repurchase their own shares. Buy backs gain increasing popularity in Germany and more than a hundred corporations have already been engaged in repurchase programs. However, it is still an unanswered empirical question how the German capital market reacts to share repurchases. Therefore, it will be analyzed employing an event study whether or not there are any excess returns associated with share repurchase announcements. In summary, the evidence indicates that there is a highly significant market reaction on the announcement day and the following day. The cumulative average excess return adds up to 4–5%. Furthermore, trading volumes of repurchasing firms are significantly higher in the announcement period. The capital market reaction is consistent with the dividend substitution hypothesis, and is strongly influenced by the prevailing capital structure.
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