Why do undervalued firms repurchase shares? Evidence based on the market-timing effect in China

Abstract

It is puzzling that few undervalued firms in China make repurchase announcements despite the value-adding motive of share repurchases. Inspired by this conundrum, this study explores the market-timing effect of repurchase signaling. Our sample consists of A-share listed firms that made stock repurchase announcements in China between 2005 and 2019, as well as their comparable peers obtained through the Mahalanobis distance matching. Changes in market indices before and after the repurchase announcements are used to measure overall market timing, followed by regression analyses. We find a positive relationship between post-announcement price reactions and market performance measures, suggesting that firms time repurchase announcements based on historical pricing information as well as overall market trends. We further propose that firms' timing capabilities are honed through attention to the capital market, which significantly increases the willingness to announce repurchase plans. Our findings help to explain why firms in China with undervalued shares make repurchase announcements.