Open Market Share Research Articles

Real Earnings Management Around Open Market Share Repurchases

Real Earnings Management Around Open Market Share Repurchases

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.

Market Reaction To Open Market Share Repurchases On The Johannesburg Stock Exchange Over The Period 2000 To 2007

This study examines the market behaviour of South African companies listed on the Johannesburg Stock Exchange (JSE) that have repurchased their own shares on the open market during the period October 2000 to December 2007. Consistent with prior studies on the North American and South African markets, the mean market response around the announcement date (-2 to +2 days) is positive, albeit quite small at 0,94%. The mean market response in the period following the announcement (+3 to +20 days) is negative at -3,95%, which differs from previous studies. The study also finds that the average 36-months buy- and-hold abnormal cumulative return for companies classified as non- resource companies is 26,57%. The largest abnormal returns are observed in small companies; for large companies no positive abnormal returns are observed. Finally, value shares have the largest abnormal returns in most of the company size categories.

Firm Heterogeneity and Investor Inattention to Friday Earnings Announcements

We report reduced market response to Friday announcements of dividend changes, seasoned equity offerings, open-market share repurchases, earnings, and mergers, which is seemingly consistent with the notion of investor inattention on Fridays. However, we show that these findings are an outcome of selection bias. Firms that make announcements on Fridays experience reduced market response on any weekday and have common unobserved characteristics across announcement types. After correcting for selection bias, there is no evidence that investors pay less attention to announcements made on Fridays relative to other weekdays. The method introduced here is applicable to other studies in which an exogenous factor influencing firm performance can actually be associated with firm characteristics.

The Credibility of Open Market Share Repurchase Signaling

AbstractOpen market share repurchase announcements are commonly associated with equity undervaluation, but their signal about firm value can often be misleading. We conjecture that executives who buy shares of their firm before an announcement add credibility to the undervaluation signal. Consistent with this hypothesis, we find that announcement returns are positively related to past insider purchases, especially for firms that are priced less efficiently. Firms whose insiders bought more shares are also more likely to complete their repurchase plans. Finally, we find that insider purchases predict post-announcement stock returns.

Information Disclosure, CEO Traits and Share Buyback Completion Rates

Open market buybacks are not firm commitments and there is limited evidence on whether firms repurchase the intended shares. We employ a comprehensive set of hand-collected data on information disclosure on open market share buyback announcements and the respective buyback trades in UK. We assess whether CEO traits can affect the buyback completion rates. We show that information disclosure is one of the major determinants of buyback completion rates. Like previous studies, we find that large and widely held firms, firms conducting subsequent buyback programmes, and firms which complete their previous programmes, have higher completion rates. Finally, we find that firms with senior CEOs, who hold external directorships and have received a business education, are more likely to complete their buyback programs. Our results suggest there is clear relationship between information disclosure, CEO traits and buyback completion rates.

Insider trading around open-market share repurchases

We examine insider trading around open-market share repurchases and find that insiders trade passively in 3 months prior to repurchase announcements and in up to 12 months following the announcements. Furthermore, both pre-announcement and post-announcement abnormal insider trading is unrelated to short-term announcement returns but correlated with long-term post-announcement returns. Our results indicate that corporate insiders trade passively around repurchase announcements in accordance with their perceived undervaluation to exploit the long-run abnormal stock returns related to the events.

Takeover Vulnerability and Long-Run Performance Following Open-Market Share Repurchases

Takeover Vulnerability and Long-Run Performance Following Open-Market Share Repurchases

Stock repurchases and treasury share sales: Do they stabilize price and enhance liquidity?

Can companies reduce the volatility and increase the liquidity of their stocks by trading them? In the context of the Italian stock market, where companies have far more leeway to sell as well as buy their own stocks than in the U.S., the answer is yes. We examine the effects of trading (open-market share repurchases and treasury shares sales) on liquidity (bid–ask spread) and volatility (return variance). Further, we examine the impact of shareholder approvals of repurchase programs on liquidity and volatility. We find clear evidence that trading increases liquidity and reduces volatility. These results are consistent with our analysis of the motives Italian companies give for making share repurchases.

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.

Economic conditions and the motives for multiple open-market share buybacks

We examine the impact of business conditions on the frequency of share repurchases. The results generally indicate that share repurchase programs are positive and statistically significant in HIGH economic states relative to the other economic states. Segmenting the data into frequency of repurchases, we find evidence suggesting different economic states exert influence on frequent and infrequent but not occasional repurchase programs. Further, we show that firms that institute frequent share repurchasing programs experience stronger returns across different business cycles compared to infrequent and occasional share repurchasers.

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

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

Does Better Corporate Governance Lend Credibility to Open-Market Share Repurchase Announcements?

I examine the role of corporate governance in explaining the wealth effect of firms’ announcing open-market share repurchases and managerial actual buyback decisions subsequent to the announcements. Using exploratory principal component analysis, I identify five factors to proxy corporate governance: centralization, supervision, business risk, objectivity, and dependency. I further construct a governance index for Taiwan to obtain a comprehensive effect from a corporate governance mechanism. I find that the capital market reaction to share repurchases announced for the purpose of signaling undervaluation is more favorable among those firms with better corporate governance. However, the actual share repurchase decision of management subsequent to repurchase announcements is independent of the firms’ extent of corporate governance. My results suggest that small size, the Big 4 accounting firms auditing and high listing requirements are determinants of actual buyback shares while management executes repurchase programs. In addition, the required pre-set execution price range before a repurchase announcement explains part of the completion of repurchase programs. This study supports the notion that a better corporate governance mechanism lends credibility to firms’ open-market share repurchase announcements and is noteworthy in assessing the wealth effect of open-market share repurchase announcements on shareholders’ value.

Open Market Share Repurchases: What the Actual Trades Tell us Regarding the Completion Rates and Risk

This paper investigates the announcement of intention to repurchase shares in the open market and the respective actual repurchase trades. We find that firms repurchase on average 74% of the intended amount of shares. In addition, size, leverage and dividend yield have a positive relationship with the completion rate of repurchase programme, contrary to the initiation lag and ownership concentration which have a negative relationship. We document that repurchasing firms experience a significant decline in systematic risk when the repurchase trades are executed, not when announcing the intention to repurchase. Finally, Fama-French regressions and the decomposition of firms’ total risk in systematic and idiosyncratic risk confirms our findings on risk changes.

Does prior record matter in the wealth effect of open-market share repurchase announcements?

This study investigates whether prior experience of share repurchases matters in the market reactions to the subsequent repurchase announcements. Specifically, we study the prior record on actual buybacks and post-announcement stock performance. We find that upon the announcement of share repurchases, stock markets not only respond more positively to those made by firms that have better record on actual buyback following their previous repurchase plan announcements, but also experience a stronger reaction for announcing firms with better stock performance after prior repurchase announcements. These results hold even after controlling for other variables that are found important in influencing the market reactions to repurchase announcements.

Optimal execution of open-market stock repurchase programs

This paper formalizes the following intuition about open-market share repurchases. Firms do open-market share repurchases to return free cash, which would otherwise be wasted. However, when the firm goes to buy its own shares with this cash, it has inside information and hence the actual execution is characterized by adverse selection. The market knows that the firm has inside information, and consequently the ask price is high to compensate for this adverse selection problem. This implies that, all else equal, the greater the adverse selection problem compared to the cash waste problem, the higher the ask price, and, therefore, the wider the bid–ask spread and the lower the share repurchase completion rate. We test this implication on a sample of U.S. firms and report evidence consistent with the model.

Share repurchase regulations: Do firms play by the rules?

Open market share repurchases are strictly regulated to prevent managers from taking advantage of selling shareholders. We examine compliance with these rules in France, where the mandatory disclosure of share repurchases provides detailed information on repurchases actually undertaken. Using a database containing 36,848 repurchases made by 352 French firms over the period 2000–2002, we show that very few firms fully comply with the regulations for all their buybacks. We document that illegal repurchases before earnings announcements are the most detrimental to selling shareholders.

The Market Liquidity Impact of Open Market Share Repurchases

We examine the market liquidity impact of open market share repurchases in a computerized order driven market. Using a detailed dataset of daily repurchase transactions on the Stockholm Stock Exchange together with intraday data on bid-ask spreads and order depths enable us to examine liquidity effects on the actual repurchase days. Overall, we find that repurchase trades inside the order driven trading system contributes to market liquidity through narrower bid-ask spreads and deeper market depths. After controlling for total trading volume, price, and volatility we still find a significant decrease of the bid-ask spread on repurchase days relative to surrounding non-repurchase days. However, repurchases executed as block trades outside the order driven trading system have a detrimental effect on the bid-ask spread, consistent with a negative response to the presence of informed managerial trading.

Insiders' timing ability and disclosure on corporate share buyback trading

PurposeDue to insufficient disclosure on open market share repurchases in the USA, at any given point in time, outside shareholders have no knowledge of whether their firm is executing open market share repurchase trades. It is hypothesized that such information disparity between outside shareholders and insiders of a repurchasing firm creates asymmetric opportunities for insiders to time their sell trades in a period when the firm is engaged in buyback trading of its own shares. Insiders have an incentive to sell when the firm is in the market supporting the price by repurchasing its shares. The purpose of this study is to examine this hypothesis (insider timing hypothesis) by investigating insiders' trading activities during the periods of corporate share buyback trading.Design/methodology/approachMultiple regression analyses are used to explore relations among trades by insiders, corporate share buyback trades, and a number of other control variables.FindingsThis study finds evidence that insiders do increase the net number of shares sold in a fiscal quarter when the firm is in the market engaged in share buyback trading.Originality/valueThis study suggests the possibility of insiders' opportunistic trading behavior during the periods of corporate open market share buyback trading.

Buyback trading of open market share repurchase firms and the return volatility decline

PurposeThe paper seeks to examine changes in daily return volatility associated with open market share repurchases.Design/methodology/approachUnivariate analyses, control sample analyses, and multiple regression analyses are employed to explore relations between daily return volatility and a number of variables.FindingsThis study finds evidence that an open market share repurchase firm, by actively buying back its shares when the share price falls, reduces daily return volatility. The results suggest that it is the subsequent actual buyback trading activity, not the announcement, that is significantly negatively associated with changes in daily return volatility. CAPM beta, a measure of systematic risk, decreases only when the firm is in the market actively repurchasing its shares.Originality/valueTo the best of the author's knowledge, this study is probably the first to connect changes in daily return volatility to actual buyback trading activities of share repurchase announcing firms. Changes in daily return volatility, or total risk, not only affect systematic risk, but also are important to underlying option holders, arbitrageurs, and investors who hold undiversified portfolios.