Open Market Share Repurchases Research Articles

Share repurchase and stock price synchronicity

ABSTRACT This paper explores the impact of open market share repurchases (OMR) on stock price synchronicity. We find that share repurchases significantly enhances the information content of stock prices, reflected in reduced price synchronicity. The mechanism includes repurchases drawing investor attention, encouraging more idiosyncratic information disclosures, and increasing media coverage. This effect is more pronounced in firms with high information asymmetry, those leveraging repurchases for reputation, or emphasizing R&D. Further analysis reveals that characteristics and execution of repurchase programmes impact differently.Overall, OMR acts as an effective signal, attracting attention from external market participants and improving the firm’s informational environment.

Does the credibility of open market share repurchase matter?

Previous studies indicate that stock prices react positively to announcements of open market share repurchases (OMR). However, global evidence indicates that some firms announce OMR programs without repurchasing shares. Kracher and Johnson (1997) define such firms as guilty of poor credibility firms. This study investigates whether credibility measurements are associated with market responses using a sample of OMR announcements from 2001 to 2021. Benefitting from the complete information disclosure in Taiwan, an accurate completion rate and cost location variables are adopted to measure a firm's credibility. The results show that the proxy of credibility, i.e., the product of the completion rate and the cost location, positively affect market responses. In addition, a probit model is utilized to predict which firm-specific characteristics lead to high credibility. The findings reveal that firms with low market-to-book ratios, low return volatility, high insider ownership, good firm performance, low dividend yield, and are classified as electronics industry have a high probability of conveying credible signals to investors. Overall, the paper supports the existence of credibility effect and suggests that firms should value their credibility.

Does the Credibility of Open Market Share Repurchase Matter?

Does the Credibility of Open Market Share Repurchase Matter?

Determinants of Repurchase Size: Evidence from the UK

The paper focuses on the factors that determine the size of an open market share repurchase in the UK. The testing covers the time period 1985–2014 and tests if the traditional motives for repurchasing shares also determine the size of the repurchase. The testing also checks if the influences of these determinants are non-linear, U-shaped or inverted U-shaped, which, to the best of our knowledge, is also a novel empirical approach. The consideration of non-linear influences on repurchase size is relevant due to the overlapping of repurchase determinants. For instance, if the distribution of excess cash is the motive for undertaking the repurchase and not replacing dividend distribution, then the influence of dividend distribution on repurchase size may conflict with the traditional expectation of repurchases being used as dividend replacements. The testing finds that the motive of using repurchases for signalling stock undervaluation has the most consistent influence on repurchase size, followed by the motives of adjusting the reported EPS when earnings are negative and for distributing surplus cash. The motive for using repurchases to adjust the capital structure to increase the debt exposure has a U-shaped influence on repurchase size, while board independence has an inverted U-shaped influence. Overall, when compared to the current literature, this paper is able to demonstrate that there is a strong consistency between the motives that lead to repurchases in the UK, and the determinants of repurchase size.

Share Repurchases and Insider Trading Behavior: Evidence from Korea

Using the context of open-market share repurchases in Korea, we examine insider trading behavior around share repurchase disclosures. In particular, we investigate managerial opportunism as a motivation for share repurchases by analyzing how insider trading behavior differs between direct share repurchases with a strong signal effect and indirect share repurchases with a weak signal effect. We obtained the following research findings. First, in direct share repurchases, insiders become net sellers after share repurchase disclosure. Second, insider net selling is the highest when a company’s stock is overvalued rather than when its liquidity is the highest. Third, insider buy trades are followed by insider sell trades in direct share repurchases. Fourth, this negative relationship is more pronounced in firms with low ownership concentration. Finally, in direct share repurchases, opportunistic firms experience inferior stock performance compared with non-opportunistic firms. Overall, our findings support the managerial opportunism hypothesis, that is, in direct share repurchases, managers engage in informed trades based on the market confirmation bias that a share repurchase is a signal of undervaluation.

The Effectiveness of Open-Market Share Repurchases as a Method of Reducing Agency Costs and Tax Burden Simultaneously

The Effectiveness of Open-Market Share Repurchases as a Method of Reducing Agency Costs and Tax Burden Simultaneously

Open market share repurchase and price volatility in Indian stock market

Open market share repurchase and price volatility in Indian stock market

Effects of Legalizing Open Market Share Repurchases: International Evidence

Effects of Legalizing Open Market Share Repurchases: International Evidence

Open Market Share Repurchases and Earnings Management

In this study we examine earnings management around open market share repurchases. We examine two hypotheses: managerial opportunism and market response, both of which predict that
 managers will manage earnings down prior to an open market repurchase. Using 2,939 repurchase announcements during 1980- 1998 we find evidence that managers do manage earnings down before share repurchases. We also 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. Altogether the evidence is consistent with the managerial opportunism hypothesis. Further investigation indicates that managers with higher ownership in the firm are more likely to manage earnings down.

Investor sentiment, trading activity and effect of the open-market share repurchase based on firm characteristics

ABSTRACT This study realises that before and after disclosure of repurchase information of share repurchasing firms, there are significant differences in investor sentiment towards the repurchasing stock. With repurchase information, repurchasing firms attempt to reduce negative investor sentiment towards the firms, thereby supporting the sentiment change motivation hypothesis. In addition, this study demonstrates that relationship between investor sentiment and stock returns differs according to investor groups. Margin trading investors, in particular, have irrational investor sentiment on share repurchase events. Finally, firm characteristics that support share repurchase influence the relationship between investor sentiment and cumulative abnormal returns in the study period.

Price Ceiling, Market Structure, and Payout Policies

To prevent firms from manipulating prices, U.S. regulators set price ceilings for open-market share repurchases. We find that market structure reforms in the 1990s and 2000s dramatically increased share repurchases because they relaxed constraints that prevent firms from competing with other traders under price ceilings. The 2016 Tick Size Pilot, a controlled experiment that partially reversed previous reforms, significantly reduced share repurchases. Market structure frictions provide a unified explanation for two puzzles: the dividend puzzle exists because previous research has overlooked market structure frictions; share repurchases increase relative to dividends over time because market structure reforms gradually reduce these frictions.

Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases

The informed options trading hypothesis posits that option prices lead stock prices. In this paper, we extended the research on this hypothesis to open-market share repurchases. Empirical tests showed that the implied volatility spread was not significantly related to buy-and-hold abnormal stock returns. However, further evidence reveal a significant relationship between implied volatility spread and subsequent stock return volatility around open-market share repurchase events. We concluded that option traders have private information on the volatility of stock returns and superior information processing ability that accounts for prescient pricing behavior in options relative to stocks.

Inflexibility of Share Repurchases*

AbstractThis paper investigates the flexibility inherent in open market share repurchases. Open market share repurchases are recognized as being flexible, since managers believe that they are not an ongoing commitment. However, I find that such returns significantly decrease upon announcing the completion of a repurchase program if firms do not concurrently announce new program authorizations. I also find that announcement returns significantly decline with completion rates and that a high completion rate acts as a negative signal, revealing that firms have finished the repurchasing activities and do not intend to continue share repurchasing in the foreseeable future. These results indicate that share repurchases are less flexible than they were previously thought to be.

Do Open-Market Share Repurchases Supply or Demand Immediacy?

This paper studies whether open-market share repurchases provide or demand immediacy. Our measure for the predicted return from providing immediacy is constructed to be uncorrelated with other potential determinants of daily executions, namely cost minimization, the provision of liquidity, and the strategic use of inside information. In average, repurchase executions provide immediacy but some repurchases demand immediacy. The results are robust to controlling for the aforementioned other potential determinants, and also earlier used measures. Repurchase executions affect the future provision of immediacy through their effect on the inventories of other immediacy providers and, therefore, the effect is smaller after past repurchases.

Informed Repurchases, Information Asymmetry and the Market Response to Open Market Share Repurchases

This paper relates informed repurchases to firm information asymmetry. We propose a new measure of informed repurchases, which is based on causality tests relating repurchase information to firm returns. Our results indicate that informed repurchases show larger abnormal returns surrounding the announcement of an open market share repurchase, which suggests the market at least partially recognizes informed repurchases. This holds after controlling for conventional information asymmetry proxies, such as firm size, number of analysts following, and analyst forecast dispersion, indicating that the market is aware of repurchase specific information not captured by traditional information asymmetry proxies. Informed repurchases demonstrate larger long-term abnormal returns at one, two, and three-year windows than high traditional information asymmetry repurchases.

Costless Versus Costly Signaling In Capital Markets: Theory And Evidence

Why is the mere announcement of an open-market share repurchase program, which involves no commitment to purchase shares, regarded as good news by the market? The first part of this paper provides a theoretical model to resolve this puzzle. The model predicts that firms with large underpricing can attract attention by announcing repurchases, and these firms do not have to use costly share repurchases as a value-correcting signal, because the trades from speculators lead to value corrections. Firms with small underpricing, however, cannot attract attention by announcing repurchases, and these firms have to use costly share repurchases as a value-correcting signal. The second part of the paper finds empirical evidence in favor of the predictions of the theoretical model.

Do Insiders Trading before Open Market Share Repurchase Announcement Give An Additional Signaling? A Study in the Indian Context

This paper aims to derive an undervaluation signal from the insider trading of Indian companies, where the ownership is complex and concentrated, investors’ protection is weak, and the insider rules and regulations are not stringent like a developed country. It also examines the relationship between insider trading and the actual share repurchase by the firm. A sample of 78 companies spanning from 2008–09 to 2014–15 is analysed in this study because of the unavailability of insider data in the Indian context. The paper finds that insider trading of sample firms are more than matching firms before buyback announcement. Insider buying before share repurchase announcement positively influences share repurchase decisions. We observed that insider buying has a positive and significant relationship, whereas insider selling has a negative and significant relationship with announcement return. We also found that insider buying has a positive and significant relationship with actual share repurchase and program completion. The study is constrained by the small sample size, so the results must be viewed by keeping this limitation in mind. The paper is the first study in the Indian context wherein the insider trading literature is extended to share repurchase to find out undervaluation signal associated with it.

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.

The impacts of investor sentiment and price uncertainty on the effects of open-market share repurchase announcements

ABSTRACTThis study probes into relationship between investor sentiment and cumulative abnormal returns (CAR) of share repurchase announcements, and it treats market return as threshold variable. By threshold regression model, it tries to find the effect of market situations on relation between investor sentiment and CAR. According to empirical result, in share market of Taiwan, investor sentiment can explain CAR. When share market is extremely pessimistic (market return lower than −16.0053%), relation between investor sentiment and CAR will change to some degree. In addition, relation between price risk of announcement company and CAR will disappear with the extremely pessimistic situation of market.

Open Market Share Repurchases in the Presence of Activist Investors

This study examines the role of activist investors in firms’ decisions to conduct open market share repurchases. Compared with firms making ordinary share repurchases, firms making activist-involved repurchases have more cash holdings, are more undervalued, experience better subsequent stock performance and similar improvements in operating performance, and eventually repurchase more shares. Moreover, repurchasing firms in which an activist investor claims to take a passive role exhibit no undervaluation, and repurchasing firms that make multiple repurchases exhibit share undervaluation only in repurchases where an activist is involved. In all, our findings suggest that activist-involvement is associated with improved corporate repurchase decisions.