Repurchase Announcements Research Articles

Pengumuman Stock Buyback dan Reaksi Pasar Saham (Studi Kasus Perusahaan di Bursa Efek Indonesia)

This study aims to examine the stock market reaction to the announcement of the stock buy back with two indicators of AAR and CAAR. The sample taken is a company that does the announcement of stock buy back in the period 2008 - 2013. Study also tested the market reaction between two groups of companies announcing stock buyback based on BAPEPAM-LK regulations are used. The first group are companies conducting announcements of stock but back by BAPEPAM-​​LK regulations number XI.B.2 which is rules on stock buy back under normal conditions and the second group by BAPEPAM-LK regulation number XI.B.3 which is rules on stock buy back on market conditions potentially crisis. The results showed that there was a significant positive market reaction around the announcement of the stock buy back as indicated by the value of AAR and CAAR are significant. The results also showed that there were significant differences in market reaction between companies that stock buy back announcements reference to BAPEPAM -LK regulations number XI.B.2 with the companies referring to BAPEPAM -LK regulations number XI.B.3. Market reaction to the company that conducting stock buy back announcements with reference to the rules BAPEPAM-LK number XI.B.2 have been reacted all positively, whereas the company that refers to BAPEPAM -LK regulation number XI.B.3 there are some that have been reacted negatively.
 Keywords : Buy back, Abnormal return, BAPEPAM-LK Regulation

Aborted stock repurchases and earnings quality

Purpose – The purpose of this paper is to try to identify the motivation of firms that announce share repurchase but do not follow it up with the actual purchase. The authors conjecture that the long-term earnings quality of such firms is low, which makes them poor candidates for actual stock repurchase. Their intention is to mimic actual repurchasers and their motivation appears to be just to get a bounce in their stock price normally associated with such announcements. Design/methodology/approach – The authors use probit analysis to ascertain whether earnings quality can predict the subsequent repurchase behavior of firms that announce share repurchase. As Gong et al. point out, the relationship between earnings management and the percentage of shares repurchased may be endogenous. In order to mitigate the potential endogeneity bias, the authors use a two-stage instrumental variable probit model adapted for this study from Lee and Masulis (2009). Findings – The results show that non-carry-through firms have lower earnings quality than carry-through firms in the pre-announcement period in all of the metrics the authors use to measure earnings quality. In the post-announcement period, the earnings quality of the non-carry-through firms declines still further and the difference in the quality becomes more pronounced. The results of probit regression show that lower earnings quality increases the likelihood of becoming a non-carry-through company. Research limitations/implications – The finding has interesting implications for investment management as investors can differentiate non-carry-through firms from carry-through repurchasers by examining the firm's earnings quality. Originality/value – The analysis shows that poor long-term earnings quality increases the chance of not carrying through on the repurchase announcement. The authors also find that the poor earnings quality of non-carry-through firms limits their ability to manage earnings downward prior to the repurchase announcement.

Informed Trading in Option Markets around Accelerated Share Repurchase Announcements

We find that the informed trading measures “abnormal O/S ratio”, “abnormal option volume” and “abnormal implied volatility skew” are negatively related to event period abnormal returns for accelerated share repurchases (ASRs) announcements. This effect is stronger for call options and with more liquid options. The abnormal implied volatility spread has information content only for firms with the more liquid options. Further, we show that abnormal returns are positively (negatively) related to the abnormal call (put) volatility surface for options with longer terms to maturity. Overall, our study provides strong evidence of informed trading around ASR announcements.

Open Market Share Repurchases in Germany: A Conditional Event Study Approach

We analyze the decision to announce an open market share repurchase and the share price reaction to the announcement. We use a conditional estimation approach which takes into account that the repurchase decision is made rationally and that, consequently, there is a potential selection bias. This approach requires a non-event sample of firms that could reasonably be expected to announce a repurchase but did not. The specific institutional rules for share repurchases in Germany allow us to construct such a sample. We find that a conditional approach yields results that are qualitatively comparable but differ in detail from those obtained using a non-conditional approach. We confirm earlier findings of negative share price performance prior to the repurchase announcement and positive and significant announcement day abnormal returns. The results of our probit models are consistent with the free cash flow hypothesis and provide at least partial support for the rent extraction, signalling, and capital structure hypothesis. The results of the cross-sectional regressions provide support for the signalling hypothesis once we control for selection bias.

Share Repurchase Announcements Together with Earnings Forecast Revisions and Long-Term Stock Performance: Evidence from Japan

This article examines whether the presence of large revisions in management EPS forecasts alongside repurchase announcements offers a more appropriate measurement for ex-post actual repurchase implementations than do repurchase programme size and earnings managements before repurchase announcements. I also investigate whether repurchase announcements alongside large revisions in management EPS forecasts are over-performed relative to repurchase announcements with no or slight revisions in management EPS forecasts. The results empirically suggest that repurchase programmes are likely to be implemented if announcements accompany large revisions in management EPS forecasts. This finding implies that EPS forecasts revisions around repurchase programmes announcements convey more information on the ex-post actual implementation of repurchase programmes than do repurchase programmes size and earnings management. The findings also indicate that management reporting behaviour regarding EPS forecast revisions is significantly and positively related to long-term stock performance, suggesting that investors evaluate the reliability of the signal in each repurchase programme based on the presence or absence of EPS forecast revisions. These results are robust concerning measurements of long-term stock performance.

Frequent Stock Repurchases, False Signaling, and Corporate Governance: Evidence from Korea

AbstractManuscript TypeEmpiricalResearch Question/IssueWe examine the relation between stock repurchases and their potential false signaling of undervaluation using unique Korean data.Research Findings/InsightsWe find that the firms that repurchase stocks frequently are less undervalued and have lower post‐announcement operating performance than firms that repurchase stocks infrequently. We further find that agency cost and industry‐adjusted Tobin's Q of frequent repurchase firms negatively affect abnormal returns from the repurchase announcement. Corporate governance, especially ownership structure and board independence, affects the probability of frequent signaling.Theoretical/Academic ImplicationsOur results suggest that the main motivation for frequent stock repurchases is likely to be false signaling, and that corporate governance can mitigate false signaling caused by agency cost.Practitioner/Policy ImplicationsFrequent stock repurchases are not necessarily motivated by firm undervaluation. Rather, the degree of agency problems and managers' abuse of information asymmetry tend to increase the frequency of stock repurchases. Therefore, frequent stock repurchases are associated with false signaling by managers; this false signaling can be lowered through better corporate governance. This finding supports the monitoring effect of corporate governance systems.

Capital structure, equity mispricing, and stock repurchases

We evaluate motives for share repurchases using a unified framework where a firm has a target capital structure and has equity that can be mispriced. We document that capital structure adjustments are a value-increasing motive for repurchases and that the extent to which adjusting capital structure through a repurchase creates value depends on the undervaluation of the firm. Underlevered and undervalued firms enjoy the greatest economic gains from a repurchase, as evidenced by the stock price reaction to the repurchase announcement, and these firms are more likely to announce a share repurchase program.

Open Market Repurchase Program, Dividend Payment Status, Information Asymmetry, and Institutional Ownership

This paper examines the relationship between previous dividend payment policy and the cumulative abnormal return around the OMR program announcement day. The results show that the market reacts more positively to OMR program announcements by non-dividend firms or with no change in dividend payment than to those of dividend paying or changing in dividend payment firms. We also provide evidence that dividend activities mitigate the effect of information asymmetry caused by ownership structure. Finally, after the 2003 tax cut, the market has also reacted less positively to open market repurchase announcements than before 2003.

The relationship between discretionary accruals and announced repurchase intentions: The case of the Taiwan Stock Exchange market

ABSTRACTPrevious studies have found significantly positive abnormal returns following repurchase announcements in the Taiwanese security market, whatever the announced intention of the repurchase. The present study shows that the abnormal returns that follow a repurchase announcement when the intention is to maintain the share price is positively related to the discretionary accruals (DAs) prior to the announcement, as well as to the repurchase percentage. Moreover, these DAs are positively correlated with operational performance following the repurchase. That is, managers use the DAs to inflate earnings prior to the repurchase announcement and thus signal future favourable operational performance. However, when the announced repurchase intention is to transfer stock to employees or option holders, the abnormal returns are positively related to the repurchase percentage but not to the DAs.

Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements

AbstractThe long‐run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the “dichotomous expectations hypothesis” which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long‐run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long‐run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.

Measuring the agency costs of dispersed ownership: the case of repurchase initiations

Empirical investigations of the agency costs of dispersed ownership yield mixed results. A possible explanation for the lack of conclusive evidence is inaccurate measurement of the extent of the problem. We suggest that the extent of the problem be measured as theory suggests: by the wealth that managers commit to their firms. We examine the relative performance of different measures of the agency problem of dispersed ownership in the context of changes in payout policy affected by repurchase initiations. We find that the suggested measure – managerial equity wealth – can explain better than any other measure the market reaction to repurchase initiations. We also find that market reaction to repurchase initiation is smaller for firms with high media coverage than for firms with low media coverage and that repurchases that follow a large rise in stock prices elicit relatively small market reactions. Lastly, we find that market reaction to repurchase announcements decreases with the dividend yield of the firm, which suggests that share repurchases are relatively less important when dividends are used to alleviate the problems of free cash flows. Our results are robust to several modifications of the main test.

Institutional trading and attention bias

Share repurchase announcements with higher turnover ratio attract more attention from institutions than events with lower turnover ratio. The stock price behavior is associated with the institutional trading behavior around share repurchase announcements. The higher exposure to the attention bias, the worse the post-trade performance the institution earns. Because of the agency problem and lack of sophistication, domestic mutual funds suffer from attention bias in Taiwan.

The Sarbanes-Oxley Act, Earnings Management, and Post-Buyback Performance of Open-Market Repurchasing Firms

AbstractWe examine how the Sarbanes-Oxley Act (SOX) affects pre-repurchase earnings management and its association with post-repurchase firm performance. Unlike prior pre-SOX studies, our post-SOX results indicate that open-market repurchasers do not engage in pre-buyback downward accrual-based earnings management. Audit committee independence, reforms in corporate governance structures, and changes in executives’ equity holdings prompted by SOX may explain the findings. Post-SOX, the significant negative association between pre-repurchase abnormal accruals and post-repurchase performance disappears, the market reaction to repurchase announcements becomes significantly less favorable, and there is no evidence of any shift away from accrual-based to real earnings management.

The Effect of Mandatory Disclosure on Open-Market Repurchases

Publicly traded companies distribute cash to shareholders either through dividends or through anonymous repurchases of the companies' own stock on the open market. Companies must announce a repurchase authorization but do not actually have to repurchase any stock, and until recently companies did not have to disclose whether or not they were in fact repurchasing any stock. Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them. They feared that such announcements might be used by insiders to exploit public investors. To reduce opportunities for exploitive behavior, the SEC required that companies disclose their repurchase activity in their quarterly filings beginning in January 2004. This Article tracks 365 repurchase programs announced in 2004 and finds that, since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement. Michael Simkovic will be a professor at Seton Hall Law School starting in Fall 2010. He authored this article as a John M. Olin Fellow in Law and Economics at Harvard Law School. He thanks the School's John M. Olin Center for Law, Economics, and Business for its generous support. He also thanks his faculty advisor, Guhan Subramanian, for his guidance. Finally, he thanks his research assistants, Victoria Salisbury, Laura Dauban, Ian J. Pohl, Yifei Chen, Joshua Reilly, and Winnie Nip for their assistance gathering and coding data. The views expressed are those of Michael Simkovic and do not reflect the views of Harvard Law School, the Olin Center, or any other organization. Email: msimkovic@gmail.com. Mobile Phone: 516-423-9187. Effect of Mandatory Disclosure on Open-Market Stock Repurchases

Closing the value gap by the means of stock repurchase announcement – the case of Warsaw Stock Exchange

This article shows that announcement of share repurchase programs on Polish market is used as a price catalyst when the spread between intrinsic and market value is large. The article presents determinants, conditions and results of 77 open market share repurchase programs conducted on Warsaw Stock Exchange (WSE) between 2005 and 2010. We find the behaviour of management boards of companies listed on WSE consistent with the market timing theory assumptions, as in most cases managers passed the information to the market without any additional economic costs. Investors who adopted the strategy to invest in undervalued stocks and hold the securities for 6 months realized a total return of 61.15% in the analyzed period.

Open Market Share Repurchases and Earnings Management

We examine the market efficiency in processing manipulated accounting statements, and provide an explanation for the long-run performance anomaly associated with open market share repurchases. We find strong evidence that repurchasing firms understate their earnings report around repurchases announcements. Furthermore, we find that the market does not identify the earnings manipulation when the repurchase is announced, and that discretionary accruals can explain a significant part of long-term positive returns following repurchases. This study also suggests that analysts are misled by the use of discretionary accruals. Analysts are more pessimistic for companies reporting low discretionary accruals. Further investigation indicates that discretionary accruals are related to the economic benefits at stake to the managers. Our analysis indicates that managers with higher ownership in the firm are more likely to manage earnings down. Altogether the evidence is consistent with the managerial opportunism hypothesis.

Buybacks Around the World

This paper documents that short-term returns around share repurchase announcements and long-run abnormal returns afterwards are following the same pattern in non-US firms as document by prior literature for U.S. firms. We test whether cross-country differences in corporate governance quality and regulatory differences can explain variation in the short- and long-run abnormal returns. We find positive announcement returns around the world, higher in better governed countries and firms, and where regulation allows the board rather than the shareholders to approve a buyback announcement. Long-run abnormal returns are also observed globally and they are related to an undervaluation index (Peyer and Vermaelen, 2009, RFS) consistent with the interpretation that managers are able to time the market by buying back their own shares at low prices. Governance quality is also related to returns. Firms with lower governance ratings outperform those with higher ratings in the long run consistent with the buyback signalling lower agency problems than expected by the market. Furthermore, long run abnormal returns are higher in board approval countries suggesting that board approval regimes make managers act more in the interest of long-term shareholders rather than using buybacks to manipulate share prices.

Business Relationship and Information Effects of Share Repurchases on Stockholders' Wealth

Using U.S. data from 2003 to 2008, this study explores the information effects of the changes in information asymmetry of repurchasing firms and their business counterparties due to share repurchases on repurchasing firms’ stockholders’ wealth. We find that the information asymmetry of repurchasing firms decreases after repurchase announcements, which enhances their stockholders’ wealth (information premium effect). However, the information premium effect is offset by the relative information advantages gained by repurchasing firms’ business counterparties (relative information advantage effect), especially by their suppliers.

The information content of open-market repurchase announcements in Taiwan

Utilizing information disclosures of open-market repurchases in Taiwan, this paper investigates two topics. The first is the association between corresponding announcing information and market responses. The results show that intention ratio is positively correlated with two-day announcement effect and the market responses of the entire execution period. However, the positive relationship is insignificant one month after the termination of the programs. The findings also reveal that price location is significantly negative when related to market responses of the overall execution period, and that such a relationship can last longer. Second, while proxy for undervaluation is properly considered, our findings suggest that the interaction between price location and market responses resulted from a higher premium rather than undervaluation, indicating that price location sends a signal of premium.

Investment opportunities and share repurchases

We examine the over-investment motivation for share repurchases using a sample of 139 Real Estate Investment Trusts (REITs) between 1996 and 2010. By combining a REIT's property portfolio data with project ROAs from the underlying real estate market, we are able to create a unique measure of the firm's investment opportunity set. Controlling for other possible buyback rationales, we find that poor investment opportunities are related to higher levels of share repurchases. Conditioning on investment opportunities, we find that the level of cash is positively related to repurchases only for low investment opportunity set firms. We also find a negative relationship between share repurchase announcement returns and investment opportunities.