Abstract
This study examines the market reactions to share repurchase announcements made by companies listed on the Johannesburg Stock Exchange from the years 2003 to 2012. The authors use an event study methodology and the Capital Asset Pricing Model to determine if there was an announcement effect when a share repurchase announcement is made. The analyses reveal that consistent with signalling theory and the announcement effect, share repurchase announcements are associated with positive abnormal returns. The average abnormal return and cumulative average abnormal return noted was 0.46% and 3.81%, respectively, for the event period (t-20, t+20). There was an observable trend of declining share prices before the share repurchase announcement. The authors also found no significant evidence that repurchasing firms have market timing ability when executing a share repurchase announcement. From a value investor’s perspective, a share repurchase program conveys a very strong signal of a healthy company
Highlights
Companies that accumulate cash quickly may find it difficult to reinvest the cash at attractive rates of returns
The study examined the existence of an “announcement effect” when a share repurchase announcement is made by a listed companies on the Johannesburg Securities Exchange (JSE)
The results indicated that share repurchase announcements are associated with positive Average Abnormal Returns and Cumulative Abnormal Returns over the event period (t -20, t+20)
Summary
Companies that accumulate cash quickly may find it difficult to reinvest the cash at attractive rates of returns Such companies may be faced with the difficult task of finding new investment opportunities which benefit its shareholders. The reason for the increase in this form of activity is motivated by the use of open market repurchases programs, where no additional premium is paid to the current share price when repurchasing a company’s shares. Both Skinner’s (2008) research into the US markets and Von Eije and Megginson’s (2008) research into the European markets indicate a trend that share repurchases are becoming a. De Ridder (2009) points out that the knowledge of how firms execute repurchases and impact of repurchases on the market have not yet been fully explored due to data constraints such as access to credible execution data and models for analysis purposes
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