Share repurchases under the Commercial Law 212-2 in Japan: Market reaction and actual implementation

Abstract

This paper investigates the share price performance surrounding share repurchase announcements under the Commercial Law 212-2 in Japan. It is found that there is a statistically significant abnormal return at the announcement about 5%. Further analyses indicate that the abnormal return at the announcement is positively related to announced repurchase percentage target; negatively related to firm size and prior returns before the repurchase decision is made. It is also found that the market initially underreacts to repurchase announcements, especially for value (low market-to-book (MTB) value ratio) stocks. There is some weak evidence that independent firms exhibit higher abnormal returns at repurchase announcements than keiretsu-affiliated firms. Overall, the evidence from Japanese repurchases is consistent with the signaling/undervaluation hypothesis advocated by Ikenberry et al. [J. Financ. Econ. 39 (1995) 181]. However, in contrast to the evidence found in the US where the announcement period abnormal returns are much higher for fixed-price tender offer than for open-market repurchases, I found the opposite evidence for those two types of repurchases in Japan. Empirical results reveal that Japanese repurchasing firms show significant market timing skills in executing open-market repurchases. They tend to repurchase higher percentage of their announced target when compared to US firms.