Open-market Repurchase Programs Research Articles

Voluntary disclosures regarding open market repurchase programs

AbstractThis paper studies voluntary disclosures that firms have suspended, resumed, or completed their open market repurchase programs. Voluntary disclosures of repurchase status updates are common and value‐relevant. They also inform subsequent repurchase activities: voluntary disclosers are more likely to complete their repurchase programs and to initiate new repurchase programs than firms with undisclosed repurchase status changes. Moreover, firms that disclose repurchase suspensions experience larger returns to subsequent repurchase authorizations, consistent with a reward for establishing a reputation for transparency via voluntary bad news disclosure. Finally, exploiting a change in repurchase reporting requirements, we document that voluntary updates are less frequent when mandatory disclosure increases. An important exception, however, is when macroeconomic uncertainty is high, such as during the Great Recession and the COVID‐19 pandemic.

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.

Share buybacks in India

We examine the market price and liquidity reaction to 239 share repurchase announcements in India. The average abnormal return on announcement day is 2.07 percent. Firms with larger promotor ownership stakes experience higher market reactions. Using the Amihud illiquidity measure and volume, we show that liquidity improves after the announcement. Open market repurchase programs increase market liquidity while tender offers do not. Liquidity improves more for high promotor ownership firms. Lastly, shorter duration repurchase programs improve liquidity more than longer duration programs. These results are consistent with our discussion of the pecking order of ownership structure in the low information transparency environment of India.

MORGAN STANLEY ROUNDTABLE ON Capital Structure and Payout Policy

A group of distinguished finance academics and practitioners discuss a number of topical issues in corporate financial management: Is there such a thing as an optimal, or value‐maximizing, capital structure for a given company? What proportion of a firm's current earnings should be distributed to the firm's shareholders? And under what circumstances should such distributions take the form of stock repurchases rather than dividends?The consensus that emerges is that a company's financing and payout policies should be designed to support its business strategy. For growth companies, the emphasis is on preserving financial flexibility to carry out the business plan, which means heavy reliance on equity financing and limited payouts. But for companies in mature industries with few major investment opportunities, more aggressive use of debt and higher payouts can add value both by reducing taxes and controlling the corporate free cash flow problem. In such cases, both leveraged financing and cash distributions through dividends and stock buybacks signal management's commitment to its shareholders that the firm's excess cash will not be wasted on projects that produce low‐return growth that comes at the expense of profitability.As for the choice between dividends and stock repurchases, dividends provide a stronger commitment to pay out excess cash than open market repurchase programs. Stock buybacks, at least of the open market variety, preserve more flexibility for companies that want to be able to capitalize on unpredictable investment opportunities. But, as with the debt‐equity decision, there is an optimal level of financial flexibility: too little can mean lost investment opportunities, but too much can lead to overinvestment.

Managerial ability, forecasting quality, and open-market repurchase program completion

Prior research suggests that managers often fail to complete announced open market repurchase (OMR) plans due to uncertainty in the firm’s future cash flows. Although high-ability managers should manage cash flows more effectively to complete share reacquisitions, there is little evidence to support this idea. This paper investigates whether CEOs with superior ability to efficiently manage corporate resources are associated with higher OMR completion rates. Our main findings are that OMR program completion rates increase with managerial ability and that the association is further moderated by the quality of management earnings forecasts. Cross-sectional analyses indicate that the positive associations are more pronounced in firms with higher cash flow volatility and fewer rent extraction opportunities. Our results imply that the repurchase completion rate is potentially an observable signal of managers’ broader ability to forecast and adapt to uncertain cash flows during the repurchase period.

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.

The Information Content of Repurchase Program Status Updates

This paper examines firms’ voluntary disclosures regarding open market repurchase (OMR) programs, i.e., announcements that firms have suspended, resumed, or completed repurchases. Such disclosures are not uncommon but have not been investigated before. Abnormal returns around announcements are, on average, positive when starting or continuing repurchases and negative when stopping repurchases, either by suspending uncompleted programs or by not immediately following completed programs with new programs. Our findings suggest there is less managerial flexibility in repurchases than previously thought. Managers’ decisions to provide status updates relate to materiality, auditor quality, product market competition, and repurchase frequency. Also, when we examine a positive shock to mandatory disclosure, we find that mandatory disclosure substitutes for voluntary disclosure and the effects of auditor quality, strategic considerations and industry peers on voluntary disclosure choice are attenuated.

The wealth effects of accelerated stock repurchases

Purpose – The wealth effect of accelerated stock repurchase (ASR) documented by previous studies is not as large as the authors would have expected. The authors believe that there are potentially important sampling problems in the previous studies, which make the results less reliable. Identifying a number of factors that can possibly affect the announcement-period returns, the purpose of this paper is to reexamine the wealth effect of ASRs. Design/methodology/approach – The paper identifies a number of factors that can possibly affect the announcement-period returns to ASRs which include: whether an ASR announcement in the press is the initiation date or the completion date of the ASR; the size of the ASR program; whether an ASR is part of an open market repurchase (OMR) program; the frequency of ASR announcements by a firm; whether other corporate news is announced simultaneously with an ASR. The paper partitions the ASR sample into three groups, and then examines the wealth effect of these groups. Findings – The empirical results show that the market reacts differently to the announcement of ASR in these three groups. The three-day announcement-period CAR (t=−1, +1) is 3.59 percent for the high-wealth-effect group, 2.01 percent for the medium-wealth-effect group, and 1.48 percent for the low-wealth-effect group. The paper also identifies the size of the ASR program, whether the ASR is announced simultaneously with an OMR or not, and the frequency of ASR announcements are the most important determinants of the announcement-period abnormal returns. Originality/value – These findings suggest that the weaker wealth effects of ASRs that have been documented in previous studies are due to sampling related issues.

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.

Do Firms Buy Their Stock at Bargain Prices? Evidence from Actual Stock Repurchase Disclosures*

We use new data from SEC filings to investigate how S&P 500 firms execute their open market repurchase programs. We find that smaller S&P 500 firms repurchase less frequently than larger firms, and at a price which is significantly lower than the average market price. Their repurchase activity is followed by a positive and significant abnormal return which lasts up to three months after the repurchase. These findings do not hold for large S&P 500 firms. Our interpretation is that small firms repurchase strategically, whereas the repurchase activity of large firms is more focused on the disbursement of free cash.

Returns Over the Life-Cycles of Open Market Repurchase Programs

We construct a large sample of announcements that firms have authorized, suspended, resumed, or completed open market repurchase (OMR) programs. Starting or continuing repurchases is associated with positive average announcement period abnormal returns. Stopping repurchases, either by suspending uncompleted programs or by not immediately following completed programs with new programs, is associated with negative average announcement period abnormal returns. We find that excess returns are not significantly different from zero over the periods between initial authorizations and program completions, i.e., the life-cycles of the OMRs; however, consistent with prior literature, we find excess returns are positive and significant over standard long-run event windows. We then document that the excess returns over standard long-run windows are substantially attributable to positive and significant announcement returns to repurchase authorizations and takeover attempts that occur after the completions of the OMR programs. We confirm that these results generalize to the entire population of OMR programs. Further analysis suggests that the positive post-OMR abnormal returns documented in prior literature are a product of misspecification of the model for expected returns that, once corrected, no longer yields evidence of excess returns. Thus, we conclude that the positive long-run excess returns in prior literature do not represent evidence of market inefficiency.

The Price Impact of Open Market Share Repurchases

This paper examines the stock performance around initiation announcements of open market share repurchase programs, the price impact of repurchase trading and the long-run abnormal stock performance following the initiation announcements in a European regulatory framework. The study uses a unique dataset on initiation announcements and actual repurchases conducted by firms listed on the Stockholm Stock Exchange during the period 2000-2009. The results show that initiation announcements of open market repurchase programs exhibit a two-day abnormal return of approximately 2%. The price impact on the actual repurchase days is positively correlated with the daily repurchase volume, and is both statistically and economically significant during the first 3 repurchase days in a repurchase program. The long-run abnormal stock performance is positively associated with the fraction of shares bought in the program and is approximately 7% the first year following the initiation announcement. The results indicate that repurchase trading provides price support and that the market participants detect and perceive the initiation announcement and the first repurchase days in a repurchase program as a signal of undervaluation.

Cash Flow Considerations Around Share Repurchase Decisions

Open market repurchase programs provide firms with the flexibility to manage the cash and risk aspects of their operations. This paper therefore aims to determine whether cash and risk matter only at the implementation stage in the sequence of a repurchase program: announcement, implementation, and withdrawal. We do find that temporary cash and risk measures only affect the implementation decision, while partially negating the traditional signaling effect around program announcement. The relevance of the flexibility afforded by the early announcement of a repurchase program is also evidenced by a steadily increasing time-to-event probability of repurchase implementation and program withdrawal.

Do REIT Announcements of Open Market Repurchase Programs Signal Value Changes in Rivals?

Executive Summary. This paper examines the short-and long-run equity returns for REITs that do not announceopen market repurchases when a rival real estateinvestment trust (REIT) announces a repurchase. Priorresearch finds evidence of significant positive returns tothe announcing REITs, on average, but does not examinethe effect of the announcement on rival REITs. We findevidence of a significant negative reaction for nonannouncingrival REITs over the event window. The returnsare directly related to the previous four week returnfor non-announcing REITs and inversely related to thefirm's market-to-book ratio and volatility of returns. Boththe announcing firms and their non-announcing rivalssignificantly outperform the broader equity market on arisk-adjusted basis in the two years following the repurchaseannouncement.

Share repurchases as a potential tool to mislead investors

A rich literature argues that stock repurchases often serve as positive economic signals beneficial to investors. Yet due to their inherent flexibility, open-market repurchase programs have long been criticized as weak signals lacking commitment. We evaluate whether some managers potentially use buyback announcements to mislead investors. We focus on cases where managers were seemingly under heavy pressure to boost stock prices and might have announced a repurchase only to convey a false signal. For suspect cases, the immediate market reaction to a buyback announcement does not differ from that generally observed. However over longer horizons, suspect firms do not enjoy the improvement in economic performance otherwise observed. Suspect firms repurchase less stock. Further, managers in suspect firms have comparatively higher exposure to stock options, a potentially endogenous result suggesting greater sensitivity to both stock valuation and to future equity dilution. Overall, the results suggest only a limited number of managers may have used buybacks in a misleading way as “cheap talk.” Yet as theory also suggests, we find no long-run economic benefit to this behavior.

Not All Buybacks are Created Equal: The Case of Accelerated Stock Repurchases

This paper investigates the new and growing practice of accelerated share repurchases (ASRs). In an ASR a firm hires an investment bank to borrow shares from existing investors. The investment bank delivers these shares to the firm, and the firm eliminates the shares immediately. The bank then repurchases shares in the open market over a period of several months and returns them back to the lenders. We document the characteristics and market performance of ASR stock. ASRs are primarily used to accelerate existing open-market repurchase programs. While the announcement return on ASRs is positive, it is very small when compared to other repurchase methods. Interestingly, the post-announcement performance of ASR stock is poor, unlike that documented in the literature for other repurchase methods. Our findings suggest that ASRs do not signal undervaluation, a motivation frequently suggested by analysts and academics for repurchases. The firm is getting the shares today but only will pay tomorrow's price.

Share Repurchases as a Potential Tool to Mislead Investors

A rich literature argues that stock repurchases often serve as positive economic signals beneficial to investors. Yet due to their inherent flexibility, open market repurchase programs have long been criticized as weak signals lacking commitment. We evaluate whether some managers potentially use buyback announcements to mislead investors. We focus on cases where managers were seemingly under heavy pressure to boost stock prices and might have announced a repurchase only to convey a false signal. For suspect cases, the immediate market reaction to a buyback announcement does not differ from that generally observed. However over longer horizons, suspect firms do not enjoy the improvement in economic performance otherwise observed. Suspect firms repurchase less stock. Further, managers in suspect firms have comparatively higher exposure to stock options, a potentially endogenous result suggesting greater sensitivity to both stock valuation and to future equity dilution. Overall, the results suggest only a limited number of managers may have used buybacks in a misleading way as “cheap talk.” Yet as theory also suggests, we find no long-run economic benefit to this behavior.

REIT Open-Market Stock Repurchases and Profitability

This study examines whether the announcement of real estate investment trust (REIT) open-market stock repurchase programs contain information content about future operating performance over the period 1990–2001. We find no evidence that REIT stock buybacks are positively related to the operating performance. In fact, the operating performance of our sample REIT firms peak at the repurchase announcement year and deteriorate in the years following the announcement of share repurchases. Nevertheless, the sample REITs show higher levels of post-repurchase operating performance when compared to those of the pre-repurchase period. Additionally, our regression analysis shows that changes in future operating performance can explain the positive announcement effect.

Why do Firms Undertake Accelerated Share Repurchase Programs?

Accelerated share repurchase (ASR) programs, an innovative way of repurchasing shares, have become increasingly popular in recent years. In this paper, we analyze firms’ rationale for undertaking ASRs rather than the traditional open market repurchase (OMR) programs. Using a hand-collected sample of ASR announcements, we test eight hypotheses regarding firms’ rationale for conducting ASR programs: the distribution of excess cash hypothesis, the target leverage-ratio hypothesis, the takeover avoidance hypothesis, the employee stock option dilution hypothesis, the managerial opportunism hypothesis, the liquidity reduction hypothesis, the EPS manipulation hypothesis, and the signaling or undervaluation hypothesis. We find that firms undertaking ASR programs are significantly larger than those undertaking OMR programs, and that ASR programs have a larger median dollar amount of deal values than OMR programs. Further, ASR firms have significantly smaller cash holdings, higher dividend payout ratios, higher pre-announcement industry-adjusted leverage ratios, and similar probabilities of being takeover targets compared to OMR firms, and ASR firms grant fewer stock options (scaled by sales) to their employees than OMR firms. Option exercise by executives does not increase following buyback announcements in either ASRs or OMRs. Stock liquidity increases following both ASRs and OMRs. Although our univariate tests reveal that ASR firms are more likely to tie the CEO bonus to EPS, our multivariate analysis does not find that EPS manipulation is a significant factor in firms choosing an ASR over an OMR program. Finally, firms undertaking ASR programs have lower pre-announcement market valuations, greater positive announcement effects, and better post-announcement operating and stock return performance, compared to those announcing OMR programs. Overall, our results are consistent with the predictions of the signaling/undervaluation hypothesis but inconsistent with those of the other seven hypotheses.

Payout Policy, Financial Flexibility, and Agency Costs of Free Cash Flow

This paper builds on the agency costs of free cash to explain how firms determine their payout policies. Payout methods considered are dividends and open-market stock repurchase programs. Dividends eliminate the agency costs of free cash by reducing cash under management (insiders) discretion, but could result in underinvestment if the paid out cash is needed later for operations. Stock repurchase programs avoid the underinvestment problem by giving insiders the option to cancel the payout. They are also an incentive to pay out cash because they provide trading gains to better informed insiders through the firm's informed trade. Because their execution is optional, however, repurchase programs cannot always prevent the waste of free cash. Payout policy is thus determined as a trade-off between eliminating agency problems with dividends and preserving financial flexibility with open-market programs.