Abstract
ABSTRACT This article aims to investigate the long-term performance of a portfolio of firms that announced the repurchase of their own stocks in the Brazilian market from 2003 to 2014. Open market stock repurchase is a means to distribute cashflow to shareholders. Some of the reasons for a firm to buy back its own stocks are: to adjust its capital structure; to reduce excessive cash levels; as an alternative to dividends; and signaling to the market in order to reduce information asymmetry between the firm and its investors. If the signaling hypothesis is true, then forming a portfolio with shares that announce repurchases generates abnormal returns in the long run. Our results show that repurchase announcements in the open market signal stock underpricing, and abnormal returns can be earned using this strategy. Results are inconsistent with the semi-strong form of the efficient markets hypothesis, which states that one cannot earn abnormal returns with publicly available information. We obtained abnormal returns using the capital asset pricing model (CAPM) and Fama and French three-factor model. Additionally, we divided the sample in growth and value firms. We found that the average abnormal return for firms that announce repurchase programs ranges from 5.4% to 7.9% for up to a 3-year period after the announcement. For value companies (more likely to repurchase stocks due to undervaluation), abnormal returns can reach up to 11.5% per year.
Highlights
Assuming that the investor will buy the shares in the month following the repurchase announcement and will hold them in his portfolio for the three years, capital asset pricing model (CAPM) indicates a positive abnormal return of 0.617% per month (t = 2.74), significant at 1%
This study found evidence that the Brazilian market does not react properly to the signs sent by open-market share repurchase announcements
Using an investment strategy with a horizon of up to three years and a portfolio with shares of companies that announced the repurchase of their own shares, we found that annual abnormal returns ranged from 5.4 to 7.9%
Summary
Stock repurchase programs are allowed in Brazil since 1976, by Laws No 6385, of December 7, 1976 (1976) and No 6,404, December 15, 1976 (1976). In Brazil, two stock repurchase methods can be used. The first is tender offer (OPA), i.e., managers define the number of stocks the company intends to repurchase, the offer expiration date and the price it intends to pay. This method is used, among other reasons, to delist a company, or for control acquisition or disposition. The second method, which is the subject of this study, consists of the repurchase by the company of its own shares in the open market. The company repurchases its shares in the market, like any investor, and is subject to a few legal restrictions, e.g., on total repurchase volume
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
