What Drives the Declining Wealth Effect of Subsequent Share Repurchase Announcements?

David K Ding,Chandrasekhar Krishnamurti,Hardjo Koerniadi

doi:10.3390/jrfm13080176

Abstract

Recent academic studies document that open market share repurchase announcements in the United States generate significantly lower returns than those reported in earlier studies. We find that the lower announcement return is associated with an increasing number of subsequent announcements in the more recent periods. Although the announcement period return from the initial announcement is positive, subsequent announcement returns are significantly decreasing. Further, we find that the decreasing returns of subsequent announcements are attributed to firms with negative past repurchase announcement returns. Our multivariate regression test results are consistent with the notion that the decreasing subsequent repurchase announcement returns are driven by hubris-endowed managers.

Highlights

SEC Rule 10b-18 of the United States’ Securities and Exchange Commission, introduced in 1982, allows a company to announce its intention to repurchase its shares at the going market price
As empirical evidence in the literature suggests that hubristic bias is pervasive among managers,5 this paper examines whether managerial hubris bias can explain the decreasing magnitude of open market repurchase announcement period returns
This study finds that firms with negative past announcement returns experience decreasing subsequent announcement returns, which is consistent with the notion that managers endowed with hubris are associated with decreasing subsequent announcement returns

Summary

Introduction

SEC Rule 10b-18 of the United States’ Securities and Exchange Commission, introduced in 1982, allows a company to announce its intention to repurchase its shares at the going market price. Market reactions to open market share repurchase announcements in the 1980s were very positive with average cumulative announcement returns recorded of more than 3 percent (see, for example, (Vermaelen 1981; Ikenberry et al 1995)).. The goal of this paper is to explain why some firms, in light of the evidence of declining average announcement period returns, continue to repeat their open market share repurchases. What has caused the depletion of open market repurchase announcement returns? Other theories used to explain repurchases are: (1) to improve their leverage ratios (Bagwell and Shoven 1988); (2) to discourage takeover attempts (Bagwell 1991); and (3) to counter the dilution effect of stock option plans (Fenn and Liang 2001; Kahle 2002)

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