Abstract
If a firm repurchases its own shares to signal that they are undervalued, then the stock price should increase to its intrinsic level. However, the path that the price takes to reach its intrinsic value is not obvious. In particular, the price could overshoot before settling at the equilibrium value. Institutional details of the Taiwanese stock market make Taiwanese data well-suited to study this. We find strong evidence that a price rebound does tend to overshoot for firms that later sell some of the shares repurchased during the original repurchase. Our study supports the view of Daniel, Hirshleifer, and Subrahmanyam (1998) that intermediate-term price drift is caused by investor overconfidence, which then results in market overreaction.
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