Open Market Share Repurchase Programs Research Articles

Theoretical and empirical analysis of options in open market share repurchases of Taiwan companies

This paper derives option pricing models to formulize the flexibility and conditions that managers have in open market share repurchase programs in Taiwan. We extend the exchange option model by including the regulatory price range restriction and the purpose of the share repurchase. We propose the exchange option model (with price range constraints) and the option portfolio model. The simulated and empirical results show that the market reaction is lower than that in the model of Ikenberry and Vermaelen (1996). The price range constraint may block the market reaction when stock prices are volatile. In addition, investors may pay less attention to the repurchase purpose of returning buyback shares to employees, since there will be a small impact on price. Furthermore, we find that the stock volatility has a significant negative impact on the market reaction to the announcements of the share repurchases.

Open Market Share Repurchase Programs and Corporate Governance: Revaluation and Company Performance

Payout policies based on share repurchase programs provide greater flexibility than do those based on cash dividends. We develop and test an empirical model in which strongly-governed companies outperform weakly-governed companies after announcing share repurchase programs. Our findings include positive associations between strong governance and both post-announcement adjusted operating performance and abnormal stock returns. The results are robust to sample selection bias, different sample criteria, governance measurement, and various control variables. In addition, governance strength is associated with larger post-announcement changes in CEO incentive compensation and merger and acquisition activity, both of which we argue are consistent with strongly-governed companies using the financial flexibility derived from choosing share repurchases over cash dividends to drive better performance. Consistent with current literature on attenuation of former anomalies, the associations we find between governance and post-announcement performance tend to disappear in the latter half of our sample period.

Are Open Market Share Repurchase Programs Really Flexible?

I use the recent financial crisis and utilize the predetermined variations in stock repurchase program ending dates to show that open market share repurchase programs are not as flexible as one might expect. My difference-in-difference estimator shows that once firms have announced such programs, they sacrifice real activities to finish them. Specifically, firms with open market share repurchase programs ending after December 2007 cut 1.9 percentage points more of capital investment, four employees more per million dollars of capital stock, and 9 percentage points more of R&D expense to fund the share repurchases than otherwise similar firms with programs ending before December 2007. The reductions represent a 7%-15% decrease of pre-crisis levels. The freed-up capital indeed goes toward the share repurchase programs: firms buyback on average 84% of the predetermined amount of the shares.

The Role of Institutional Investors in Open-Market Share Repurchase Programs

We use transaction-level institutional trading data and the data on US firms' actual repurchases made available by the 2003 revisions to the Exchange Act to analyze the ability of institutional investors to create an information advantage for themselves around open market share repurchases. We document several results new to the literature. First, institutional trading prior to an open-market share repurchase (OMR) announcement has significant predictive power for the magnitude of the abnormal return to the repurchasing firm’s equity around OMR announcements. Second, institutional trading immediately after an OMR announcement has significant predictive power for the firm’s subsequent stock return performance: the larger the net buying by institutions, better the subsequent long-run stock returns. Third, institutional trading immediately after an OMR announcement has significant predictive power for the actual repurchases by the firm: a larger amount of net buying of the firm’s equity by institutions is associated with a larger actual repurchase by the firm in the subsequent period. Fourth, institutional trading has predictive power for the change in the firm's information asymmetry from before the OMR announcement to after: a larger amount of net buying by institutions is associated with a larger decrease in the degree of information asymmetry facing the firm in the equity market. Finally, institutions are able to realize significant abnormal profits (net of commissions and trading costs) by trading in the equity of firms undergoing open-market repurchases. Overall, our results are consistent with the notion that institutional investors are able to generate a significant information advantage for themselves about firms undertaking OMR programs.

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.

The Signaling Effect and Abnormal Returns of Open Market Share Repurchases in Poland

The phenomena of excessive return following stock repurchase programs are well-documented in financial literature. The majority of studies apply to well-developed markets. The aim of this paper is to scrutinize this anomaly on Polish stock exchange in order to develop general conclusions about the signaling effect of share repurchases. I find that different market regulations and corporate governance practices influence the credibility of stock repurchase programs thus influencing investor’s return. In most cases, the announcement of share repurchase program was designed to deliver costless information about stock underpricing. and was followed by rather sluggish repurchase actions. Next, we check the credibility of open market share repurchase programs by measuring the signaling effect among groups of small, medium and large companies. This is because of the assumption, that the credibility of companies declarations improves with company size. The article presents the results of a research conducted on share buybacks done by companies listed on WSE in years 2005-2010. The event study methodology shows, that a share buyback announcement is a positive information for the shareholders and allows to obtain statistically significant abnormal returns the first days after the announcement. The interpretation of the signal is depended on the size of the company. In the sample of the lowest market capitalization companies one cannot observe any statistically significant effect.

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.

Open Market Share Repurchase Programs and Corporate Governance: Revaluation and Company Performance

Open Market Share Repurchase Programs and Corporate Governance: Revaluation and Company Performance

Operating performance following open market share repurchase announcements

I document that operating performance improves following 4,729 announcements of open market share repurchase programs from 1981 to 2000. Moreover, the capital market responds favorably to earnings announcements after the program announcements. Further analysis reveals that both the operating performance improvement and the positive earnings announcement returns are limited to those firms that actually repurchase shares during the same fiscal quarter. Last, I report that a subsample of firms that initiate the repurchases in quarters following the program announcements experience improvements after the initiation quarter, suggesting that actual repurchases, and not announcements per se, portend future performance improvements.

Share Repurchase Programs and Liquidity: An Examination of Dutch Auction Repurchases

ABSTRACT The existing evidence on the liquidity effects of share repurchase programs is mixed. However, previous studies focused solely on open market repurchase programs which do not allow for precise estimates of share buy-back intensity to measure liquidity effects. Since firms are under no obligation to disclose when (or even if) they are repurchasing shares, typically little is known about the precise timing and execution of open market repurchases. Furthermore, open market share repurchase programs are often renewed and can span several years. The indefinite time horizon clouds the ability to measure the permanent impact of share repurchase programs on firm liquidity. Consequently, we examine Dutch auction share repurchase programs to circumvent these problems, and investigate the temporary and permanent effects of repurchase programs on liquidity. The advantage of studying the Dutch auction format is twofold. First, the timing, quantity, and price of repurchases are known from company press releases. Second, Dutch auctions occur over a relatively short period (average tender period is typically 30 days). Therefore, our analysis of Dutch auction share repurchase programs allows us to investigate the short-term effects that occur over the one-month tender period. More importantly, we can examine possible lasting effects on liquidity after the repurchase program is over. We find that the improvement in liquidity is transitory and limited to the one-month tender period when the firm’s offer to repurchase shares is outstanding. Improvements in liquidity over longer intervals (or permanent impacts due to the share repurchase program) appear to be the result of an overall price improvement and a reduction in volatility and not because of a structural change in market dynamics. In sum, our results dovetail with those of Cook, Krigman, and Leach (2004) where improved liquidity occurs on the days when the firm actually enters the market and repurchases shares.

False Signals from Stock Repurchase Announcements: Evidence from Earnings Management and Analysts' Forecast Revisions

This paper investigates the possibility of false signaling by firms announcing open-market stock repurchases. We examine a sample of 281 open-market share repurchases, with the self-styled reason of undervaluation, by firms between 1993 and 1998. Our results showed no evidence of an upward revision in the earnings forecasts of analysts following open-market share repurchase announcements, finding instead, small negative surprise revisions, which contradicts the prevailing empirical evidence. Moreover, we found that surrounding share repurchase announcements, managers manipulated discretionary accruals upward. We posit that this action, on the part of management, is to persuade market participants that the equity of their firm is undervalued. We also found no evidence of the market underreaction phenomenon but did observe negative abnormal returns in the 3- to 12-month period subsequent to the announcement. Overall, our results confirm that with a weaker signaling power, open-market share repurchase programs have been used to send a false signal to the marketplace, by emphasizing an undervalued equity.

The Information Content of Share Repurchase Programs

Contrary to the implications of many payout theories, we find that announcements of open-market share repurchase programs are not followed by an increase in operating performance. However, we find that the systematic risk and the cost of capital of these firms decline after these events. Further, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Taken together, our results suggest that the market reacts positively to share repurchase announcements because these events are associated with a reduction in the agency costs of free cash flows and with a reduction in the firm's cost of capital. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in systematic risk.

THE INTRA‐INDUSTRY EFFECTS OF OPEN MARKET SHARE REPURCHASES: CONTAGION OR COMPETITIVE?

AbstractWe examine the extent to which announcements of open market share repurchase programs affect the valuation of competing firms in the same industry. On average, although firms announcing open market share repurchase programs experience a significantly positive stock price reaction at announcement, portfolios of rival firms in the same industry experience a significant and contemporaneous negative stock price reaction. This suggests that perceived changes in the competitive positions of the repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Thus, the competitive intra‐industry effects of open market repurchases outweigh any contagion effects. In addition, cross‐sectional tests indicate that these competitive effects are more pronounced in industries characterized by a lower degree of competition and less correlation between the stock returns of the repurchasing firm and its rivals.

Open-Market Share Repurchase Programs and Bid-Ask Spreads on the NYSE: Implications for Corporate Payout Policy

This study analyzes bid-ask spreads surrounding announcements of open-market share repurchase programs for a sample of 248 announcements of repurchase programs by NYSE firms over the period January 1984 through June 1988. The sample includes 158 announcements of new programs and 90 announcements regarding continuations of already existing programs. Contrary to the theory that spreads increase surrounding the announcement of open-market share repurchase programs, with both univariate and multivariate tests that control for changes in volume, changes in stock price volatility, and changes in the level of stock price, we find no evidence of an increase in spreads surrounding announcements of open-market share repurchase programs.