Open-market Repurchase Announcements Research Articles

Open repurchase announcements and abnormal returns of Indian firms: An industry-wise analysis

Although the tender offer buyback method has gained significance over time, many companies still prefer open market repurchases. The existing literature focuses mainly on the impact of buyback announcements, specifically on stock returns; however, buyback announcements and abnormal returns in the case of open market repurchases have not yet been studied in detail, especially across industries in the Indian context. This study, therefore, attempts to analyze the impact of open market repurchase announcements on the stock returns of Indian firms. To that end, the event study methodology has been used for a period of 31 days, i.e. 15 days prior to and 15 days after the buyback announcement on a filtered sample of 100 firms during the period 2010–2020. The results of the study indicate that the returns were more favorable in the short run. The findings do not support the undervaluation rationale of firms behind the open buyback statement. The low-profit opportunities in the prior event window convey investors’ predictions about the repurchase announcement. In the context of industries, the manufacturing sector seemed to be far better than IT & telecom, chemical, and pharma firms as the returns were statistically significant for five (5) out of 31 days. The industry-specific results also suggest that the profit opportunities are majorly in the pre-announcement phase. The overall findings corroborate that share repurchases might be irrelevant to shareholders’ wealth. Therefore, open market buybacks may support decisions related to capital structure changes. AcknowledgmentThe infrastructural support provided by the FORE School of Management, New Delhi in completing this paper is gratefully acknowledged.

Signal strength adjustment behavior: Evidence from share repurchases

This paper extends the signaling hypothesis by investigating the signal strength adjustment behavior with respect to the announcement of an open market repurchase (OMR). Given that an OMR is a non-binding commitment for the repurchasing firm, the stock market would likely scrutinize the credibility of the undervaluation signal from the OMR announcement of the firm. This may compel the manager to engage in various mechanisms in order to strengthen the undervaluation signal of the OMR announcement. This paper investigates whether managers of repurchasing firms would modify the terms of the OMR program when the simultaneous announcements of bad news threaten the credibility of the signal from the OMR announcements. Consistent with our signal strength adjustment hypothesis, we find that managers of repurchasing firms increase (shorten) the repurchase plan size (period) with the magnitude of bad news in the simultaneous announcements. Our results also show that the stock market reacts positively to the signal strength adjustments, indicating that they are informative to the market. These results hold after using various techniques to control for sample selection bias.

Mandatory Repurchase Disclosure, Opportunistic Repurchases, and Their Real Effects

In 2003, the SEC amended Rule 10b-18, significantly increasing the disclosure requirements for and transparency of share repurchases with the intention to curb false signaling by management. Bonaime (2015) finds that the 2003 SEC amendment reduced firms’ open market repurchase announcements and increased repurchase announcement completion rates, resulting in a decline in false signaling. In this paper, we examine the effect of the 2003 SEC amendment on firms’ opportunistic use of stock repurchases to meet or beat analyst earnings per share (EPS) forecasts and the resultant negative real effects. We find that the 2003 SEC amendment curtails opportunistic repurchases, enables the market to recognize and discount opportunistic repurchases, and eliminates the employment and investment reductions following opportunistic repurchases. Our evidence suggests that the increased transparency of share repurchases mandated by the 2003 SEC amendment has significantly altered both the corporate use of repurchases as an earnings management device and the negative real consequences of opportunistic repurchases.

Testing the Real Option Hypothesis on the Declining Open-Market Repurchase Announcement Returns

Recent studies report that open-market repurchase announcements have become less attractive to stock investors. This study documents that lower announcement returns are attributed to subsequent repurchase announcements, which have increased in number in recent years. Using the real-option-to-delay framework proposed by Ikenberry, D and T Vermaelen (1996). The option to repurchase stock. Financial Management, 25, 9–24, this study finds evidence consistent with decreasing value of the option to repurchase shares prior to subsequent open-market repurchase announcements. This explains the decreasing market reactions to such announcements.

Press Release Management around Accelerated Share Repurchases

ABSTRACT Accelerated share repurchases (ASRs) have gained popularity in recent years. At the inception of an ASR, a firm receives most of the shares that would be repurchased at the current stock price. At the completion of the ASR, the repurchase price is adjusted to the average stock price during the ASR contract period. I find that managers increase the media coverage of negative press releases before the inception date but not during the contract period. While prior research has documented that managers deflate stock prices before open market repurchase announcements to reduce subsequent repurchase prices, this paper suggests that, in ASRs, managers rank accelerating share delivery higher than reducing the repurchase price.

Does reputation matter? Evidence from share repurchases

This paper examines whether the stock market considers the firm's reputation established through a history of management earnings forecasting when it evaluates open market repurchase announcements. We refer to this established reputation as the firm's “forecast reputation”. We find that while the stock market considers the firm's “repurchase reputation” (proxied by prior repurchase completion rates), it also considers the firm's forecast reputation established from the accuracy of prior management earnings forecasting, suggesting a spillover effect of forecast reputation. Further, interaction test between the two reputation variables reveals that the market reacts more to the firm's forecast reputation when its repurchase reputation is low. Additional analyses suggest that when a firm announces a share repurchase program for the first time (i.e., when there is no repurchase reputation), investors turn to the forecast reputation within the firm as an alternative source of reputation, on which the credibility of repurchase announcements is assessed. Overall, our study provides evidence that firms establish a reputation in the market through multiple sources of announcements.

Detecting Earnings Information in Repurchase Announcements Using the Luck of the (Double) Irish

Previous studies disagree about whether open market repurchase announcements contain positive, negative, or no information about earnings expectations. In this comprehensive study, I use a novel measure of analyst earnings forecast revisions that corrects for undetected biases found in prior studies. While I find no evidence of average changes in earnings expectations across a 28-year sample of repurchase announcements, I find positive post-announcement forecast revisions in a subsample of firms likely to be using “Double Irish” offshore subsidiary structures to delay or avoid U.S. taxes on firm profits. Tests of this subsample utilize a quasi-natural experiment related to a 2007 IRS repurchase regulation which imposed additional repurchase-related costs on these firms. The results are robust to a variety of test specifications and proxies for earnings. This link between repurchase costs and positive earnings revisions is broadly consistent with signaling models of payouts and suggests that managers may announce especially costly repurchases when earnings expectations are underestimated by outsiders.

CEO Optimism and the Credibility of Open-Market Stock Repurchase Announcements

ABSTRACTGiven their low-cost and low level of commitment, open-market stock repurchase announcements are often viewed by the market with a degree of skepticism, leading to a weak initial market reaction followed by positive stock price drifts. The authors argue that the repurchase announcements made by optimistic CEOs should be more credible than those made by nonoptimistic CEOs. Our results show that optimistic CEOs are more likely to actually buy back their shares after the announcements and the abnormal returns following repurchase announcements are larger for optimistic CEOs. This evidence suggests that CEO optimism is an important factor that the market seems to overlook while evaluating the credibility of open-market repurchase announcements. Our main contribution is to link one of the most important managerial traits, optimism, to the open-market repurchases.

Open-Market Repurchases, Firm Quality, And Discouraging Short Sellers

Announcing an open-market repurchase (OMR) is presented as a potential tool for managers to discourage short selling in their firm’s stock. Empirical testing determines the relation that abnormal short selling that follows an OMR announcement has with abnormal returns during the announcement period and announcing firm quality. Results show that post-announcement abnormal short sales decrease with positive abnormal returns during the OMR announcement period but that announcing firm quality is unrelated to the level of post-announcement abnormal short sales. Therefore, announcing an OMR may be an effective tool to discourage short sales in a firm’s stock independent of firm quality because abnormal returns around an OMR announcement tend to be positive and short sellers do not appear to distinguish among announcing firms based on firm quality.

Signaling Strength And The Announced Size Of An Open-Market Repurchase

An open question exists as to whether the announced size of an open-market repurchase (OMR) possesses positive signaling effects. Relying on short sales that occur during the five trading days that follow an OMR announcement as an indication of the signaling effect of the size of the OMR program, I find that post-announcement short sales tend to decrease with positive returns surrounding OMR announcements but that post-announcement short sales do not decrease with the announced size of an OMR program. Therefore, I conclude that while announcements of OMR programs serve as positive signals, in general, the announcement of a larger OMR program does not possess a stronger positive signal.

Network Centrality and Managerial Market Timing Ability: Evidence from Open-Market Repurchase Announcements

The authors find a U-shaped relation between long-run excess returns after buyback authorization announcements and firm centrality in the Input-Output trade flow network.As centrality may be non-linearly related to information asymmetry between firm insiders and outside investors, these results provide direct support for the market timing hypothesis of buybacks: while high centrality can increase information asymmetry due to information processing costs, low centrality can increase it due to information availability differences.Strikingly, unlike all past findings of positive abnormal returns in the literature on repurchases, significantly negative post-buyback announcement long-run excess returns are observed for some mid-centrality firms.

Product market competition and earnings management around open-market repurchase announcements

This study examines how market competition influences the extent and types of earnings management activities around share repurchase announcements. We find that repurchasing firms operating in more competitive industries conduct significantly less downward accrual-based and real activity management than those in less competitive industries. Furthermore, we document that both before and after the passage of the Sarbanes–Oxley Act (SOX), the negative relation between market competition and real earnings management around repurchase announcements remains, while the negative relation between market competition and accrual-based earnings management is only pronounced pre-SOX, but not post-SOX.

Mandatory Disclosure and Firm Behavior: Evidence from Share Repurchases

ABSTRACTThis paper examines changes in corporate behavior around the 2003 modification to SEC Rule 10b-18, which mandates enhanced disclosure of repurchase transactions. Firms announce significantly fewer and slightly smaller open market repurchase plans in the enhanced disclosure environment. However, completion rates (the amount of stock repurchased as a percentage of the announced amount) significantly increase. More conservative announcement strategies and more aggressive completion rates are consistent with a decline in false signaling. Indeed, open market repurchase announcements are viewed as more credible, on average, in the enhanced disclosure environment; after controlling for firm characteristics, cumulative abnormal announcement returns are significantly greater in the high disclosure period. As with any analysis based on a regulatory change affecting all firms simultaneously, other unobservable, macroeconomic trends could have affected repurchase behavior. Nonetheless, these results are consistent with significant changes in corporate behavior around new mandatory disclosures.JEL Classifications: G14; G30; G35; G38; M48; K22

Market underreaction to open market share repurchases on the JSE

This study examined the long-term performance of open market share repurchase announcements made by companies listed on the JSE during their reporting periods including 1 July 1999 to 2009. A total of 195 open market share repurchase announcements were identified. A maximum outperformance of about 35% was found on day t+550 (about two years subsequent to the announcement). After splitting the sample into 'value' (low P/E ratio) and 'growth' shares (high P/E ratio), it was found that the outperformance was almost entirely confined to the value portfolio, reaching a maximum of about 80% by day t+630 (about two-and-a-halfyears subsequent to the announcement). This study applied a more robust research methodology than used in earlier South African research on this topic; it also used an improveddataset and extended the research period, compared to other research. The results of this study showed much higher positive abnormal returns than were found in earlier international and South African studies. Investors should takeadvantage of the informational value of open market repurchase announcements and the related significant abnormal returns to be earned.

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 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.

If It's Good for the Firm, It's Good for Me: Insider Trading and Repurchases Motivated by Undervaluation

AbstractMy findings suggest that information inherent in insider trading can be used to identify undervalued repurchasing firms. I examine the relation between insider trading and the performance of open market repurchase (OMR) firms. I show that firms with high net insider buying prior to OMR announcements not only earn abnormal stock returns in both the short‐ and long‐run, but also exhibit better operating performance. Overall, the evidence is consistent with insiders timing their trades prior to OMR announcements.

If It’s Good for the Firm, It’s Good for Me: Insider Trading and Repurchases Motivated by Undervaluation

My findings suggest that information inherent in insider trading can be used to identify undervalued repurchasing firms. I examine the relation between insider trading and the performance of open market repurchase (OMR) firms. I show that firms with high net insider buying prior to open market repurchase announcements not only earn abnormal stock returns in both the short- and long-run, but also exhibit better operating performance. Overall, the evidence is consistent with insiders timing their trades prior to open market repurchase announcements.

Mandatory Disclosure and Firm Behavior: Evidence from Share Repurchases

This paper examines changes in corporate behavior around the 2003 modification to SEC Rule 10b-18, which mandates enhanced disclosure of repurchase transactions. Firms announce significantly fewer and slightly smaller open market repurchase plans in the enhanced disclosure environment. However, completion rates (the amount of stock repurchased as a percentage of the announced amount) significantly increase. More conservative announcement strategies and more aggressive completion rates are consistent with a decline in false signaling. Indeed, open market repurchase announcements are viewed as more credible on average in the enhanced disclosure environment; after controlling for firm characteristics, cumulative abnormal announcement returns are significantly greater in the high disclosure period. As with any analysis based on a regulatory change affecting all firms simultaneously, other unobservable, macroeconomic trends could have affected repurchase behavior. Nonetheless, these results are consistent with significant changes in corporate behavior around new mandatory disclosures.

The information content of Canadian open market repurchase announcements

PurposeThis study seeks to examine the role of firm characteristics and insider private information in affecting Canadian firms’ repurchase decision and the associated announcement period stock return.Design/methodology/approachPast studies of announcement returns employ a standard event‐study methodology, which produces biased parameter estimates when the corporate event is voluntary. This study employs the conditional event study methodology, which is free of self‐selection bias. The conditional model also provides a direct test of whether private information is conveyed through the announcement.FindingsIt is found that firms are more likely to buy back shares if they have greater free cash flows, lower market‐to‐book ratios, poor prior stock performance, and their insiders have large shareholdings. It is shown that the announcement period returns are strongly and positively related to the private information possessed by company insiders. The market reacts to the reason given for the repurchase and reacts less positively to repeat repurchases. Overall, the evidence is consistent with Isagawa's model which argues that repurchases signal that the insiders are not the type to waste their free cash flow.Research limitations/implicationsThis methodology should also be applied to US open market repurchases.Originality/valueThis is the first study to: explicitly test whether the abnormal return is attributable to private information; employ the conditional event study methodology in examining the announcement return; and study the returns to Canadian repurchase announcements.