Open Market Stock Repurchases Research Articles

Open-market stock repurchases, insider trading, and price informativeness

Open-market stock repurchases, insider trading, and price informativeness

Unexpected Share Repurchase Announcements

Open-market stock repurchase announcements are generally perceived by the stock market as a signal of firm undervaluation. Our study shows that repurchase announcements that were preceded by SEOs of other firms in the same industry within the prior six months (namely SEO-RPs) are more likely the result of lacking investment opportunities than signaling undervaluation, especially in concentrated industries. Specifically, we find investors response negatively to SEO-RP announcements while react positively to regular repurchase announcements. The higher the intensity of SEO activities in the industry, the more negative market reaction to SEO-RP announcements. We argue that the market doesn’t expect a repurchase announcement when other rival firms are raising more capital via SEOs. These SEO-RPs represent a negative surprise to the market and lead to a downward adjustment in value of the repurchasing firms in the announcement window. In the three-year post-announcement periods, the SEO-RP firms underperform regular repurchasing firms in both stock return and operating performance. Moreover, while regular repurchasing firms gradually increase their capital expenditures, SEO-RP firms significantly reduce their capital expenditures. These findings support our arguments that repurchase announcements that immediately follow SEOs of rival firms (SEO-RPs) more likely indicate the announcing firms entering a slower growth rate with fewer investment opportunities than signal the undervaluation problem. The underperformance in stock return and operation combined with a significant reduction in capital expenditures in the post-announcement periods are consistent with this logic and also explain why the market reacts negatively to SEO-RP announcements.

Underreaction to open market share repurchases,

ABSTRACT This article aims to investigate the long-term performance of a portfolio of firms that announced the repurchase of their own stocks in the Brazilian market from 2003 to 2014. Open market stock repurchase is a means to distribute cashflow to shareholders. Some of the reasons for a firm to buy back its own stocks are: to adjust its capital structure; to reduce excessive cash levels; as an alternative to dividends; and signaling to the market in order to reduce information asymmetry between the firm and its investors. If the signaling hypothesis is true, then forming a portfolio with shares that announce repurchases generates abnormal returns in the long run. Our results show that repurchase announcements in the open market signal stock underpricing, and abnormal returns can be earned using this strategy. Results are inconsistent with the semi-strong form of the efficient markets hypothesis, which states that one cannot earn abnormal returns with publicly available information. We obtained abnormal returns using the capital asset pricing model (CAPM) and Fama and French three-factor model. Additionally, we divided the sample in growth and value firms. We found that the average abnormal return for firms that announce repurchase programs ranges from 5.4% to 7.9% for up to a 3-year period after the announcement. For value companies (more likely to repurchase stocks due to undervaluation), abnormal returns can reach up to 11.5% per year.

Do open-market stock repurchases convey firm-specific or industry-wide information? Evidence from REITs

This study examines the extent of firm-specific and industry-level information conveyed in open-market stock repurchases announced by REITs. We measure information revealed in open-market stock repurchase announcements using stock return and decompose the stock return into firm-specific, industry-wide, and market components. We find that the announcement period return is mainly attributed to the firm-specific component. However, long-term returns following the announcement are largely due to the industry return components. We also find that changes in profitability are not related to the announcement abnormal return. Our results suggest that the repurchase signal is about the intrinsic value of a REIT rather than the REIT’s future prospect. Moreover, the repurchase signal is fully incorporated into the pricing process at the announcement.

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.

Why Do Firms Repurchase Their Stocks? Evidence from an Emerging Market

Though it has recently become a contemporary financial management tool, stock repurchase can be so dangerous that it may raise concerns about insider trading and manipulative transactions. In fact, such concerns underlie the most important critique of stock repurchase and justify its prohibition, at least its restriction, in several jurisdictions to date. Turkey, as one of these jurisdictions, has latterly been updated in order to allow open market stock repurchases with certain restrictive provisions. We intend to explore why Turkish firms decide to repurchase their stocks. Having employed a conditional logistic regression model, the results reveal that signaling hypothesis, i.e. undervaluation and positive information dissemination, and excess capital and free cash flow hypothesis, i.e. excess cash distribution, hold for Turkish companies.

WHY DO FIRMS REPURCHASE THEIR STOCKS? EVIDENCE FROM AN EMERGING MARKET

Though it has recently become a contemporary financial management tool, stock repurchase can be so dangerous that it may raise concerns about insider trading and manipulative transactions. In fact, such concerns underlie the most important critique of stock repurchase and justify its prohibition, at least its restriction, in several jurisdictions to date. Turkey, as one of these jurisdictions, has latterly been updated in order to allow open market stock repurchases with certain restrictive provisions. We intend to explore why Turkish firms decide to repurchase their stocks. Having employed a conditional logistic regression model, the results reveal that signaling hypothesis, i.e. undervaluation and positive information dissemination, and excess capital and free cash flow hypothesis, i.e. excess cash distribution, hold for Turkish companies.

On Choosing an Optimal Dividend Policy in India: A Test of Substitution Hypothesis, 1999–2016

We aim to highlight quantitative significance of share buyback in an emerging economy, India by documenting its emergence and trends in stock over time, 1991–2011. The market reaction to the impact of stock repurchase program and dividend increase announcements on share price behavior and their relative signaling power with reference to Indian firms is empirically tested. Further, the problem at hand is to provide insights to what are the determinants of the choice between increasing dividends and utilizing an open market stock repurchase and the impact of that choice on the stockholders’ wealth position in India. The analysis is conducted from two points of view. First, we investigated how the market perceives and reacts to announcements of cash distribution method through dividend increase and to share repurchase. Second, we looked into what determinates corporate payout policy when marginal disbursements could be done with either dividend increase or stock repurchases. Some evidence is provided to reject the null hypotheses that managers do not discriminate in their choice of a payout method. Dividend paying and stock repurchasing firms display significant differences in firm characteristics. Further, firms do not appear to randomly choose between the various disbursements choices. Though weakly, our results suggests that large firms like to substitute repurchases for dividends.

The Optimal Timing of Open Market Stock Repurchases

Using a continuous-time real options approach we determine the conditions under which a value-maximizing company would conduct an open market stock repurchase to exploit the undervaluation of shares. We find the optimal timing of such repurchases as well as the optimal amount a company should repurchase and analyze how it depends on market parameters. Obtaining the announcement returns from the authorization of stock repurchases from our model allows us to derive testable empirical implications.

Anomalous Price Behaviour around Open Market Stock Repurchase Announcements in India

Executive Summary This article examines the impact of open market share repurchase announcements on stock returns in the Bombay Stock Exchange (BSE). The main objective is to examine whether share repurchase announcements under the open market route have any significant impact on the returns of the stocks traded in the BSE. The article covers the period from 2009 to 2013. For sample selection, two criteria were used: first, the firm should have been listed in the BSE for at least 28 trading days before the repurchase announcement date, and second, the firm should have all relevant data required by this study. A total of 95 repurchase announcements fulfilled these criteria. The analysis period extended from –28 to +28 trading days relative to the repurchase announcement date ( t = 0). The findings of the study will help us to understand how the market responds to share repurchase announcements in India and whether a firm actually benefits by repurchasing its own shares from the market. This study uses a standard event methodology based on an ordinary least squares market model with the aim of finding out whether repurchase announcements generate any abnormal return around the repurchase announcement date. While applying the market model for estimating the abnormal returns, the regression is estimated based on the stock return of the firm and market return of the previous 120 trading days. So, here the estimation window takes into account 120 observations. Using this, the expected returns are generated and then the abnormal returns are derived for the event window, 28 days prior to the event date and 28 days after the event date. The findings of the study indicate that share repurchase announcements do not necessarily generate abnormal stock returns in the Indian equity market unlike developed economies like the US, Canada, and Australia. The whole sample is further divided into various subsamples on the basis of firm size and size of repurchase. The subsample analyses reveal that smaller firms do not necessarily experience higher abnormal stock returns following repurchase announcements than that of the larger firms. The findings weakly support the view that larger repurchase size generates greater abnormal stock returns than the smaller ones.

The post-repurchase announcement drift: an anomaly in disguise?

Purpose – The purpose of this paper is to reexamine the stock price drifts after open-market stock repurchase announcements by differentiating actual repurchases from repurchase announcements and by controlling for the repurchasing firms’ earnings improvement in the announcement year relative to the prior year. Design/methodology/approach – The authors use the calendar-time method and matching method based on different criteria to calculate the post-announcement abnormal returns. Findings – The results show that only firms actually repurchasing their shares exhibit a positive post-announcement drift. More importantly, the authors find that these repurchasing firms have the same post-announcement drift as their matching firms that have similar size and earnings performance but do not repurchase. This supports the argument that the post-repurchase announcement drift found in previous studies is not a distinct anomaly but the post-earnings announcement drift in disguise. Social implications – The post-repurchase announcement drift found in previous studies is the post-earnings announcement drift in disguise. Originality/value – The study shows that because high earnings performance positively relates to real repurchase activities, controlling for earnings performance in examining whether a drift occurs after repurchase announcements.

The Effect of Mandatory Disclosure on Open-Market Repurchases

Publicly traded companies distribute cash to shareholders either through dividends or through anonymous repurchases of the companies' own stock on the open market. Companies must announce a repurchase authorization but do not actually have to repurchase any stock, and until recently companies did not have to disclose whether or not they were in fact repurchasing any stock. Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them. They feared that such announcements might be used by insiders to exploit public investors. To reduce opportunities for exploitive behavior, the SEC required that companies disclose their repurchase activity in their quarterly filings beginning in January 2004. This Article tracks 365 repurchase programs announced in 2004 and finds that, since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement. Michael Simkovic will be a professor at Seton Hall Law School starting in Fall 2010. He authored this article as a John M. Olin Fellow in Law and Economics at Harvard Law School. He thanks the School's John M. Olin Center for Law, Economics, and Business for its generous support. He also thanks his faculty advisor, Guhan Subramanian, for his guidance. Finally, he thanks his research assistants, Victoria Salisbury, Laura Dauban, Ian J. Pohl, Yifei Chen, Joshua Reilly, and Winnie Nip for their assistance gathering and coding data. The views expressed are those of Michael Simkovic and do not reflect the views of Harvard Law School, the Olin Center, or any other organization. Email: msimkovic@gmail.com. Mobile Phone: 516-423-9187. Effect of Mandatory Disclosure on Open-Market Stock Repurchases

Legal Institutions, Ownership Concentration, and Stock Repurchases Around the World: Signal Mimicking?

One of the central puzzles of signaling theory is how to assess signal quality, in particular the potential for signal mimicking. Our study provides evidence of signal mimicking in the context of stock repurchases. Employing an ex-ante proxy for the likelihood of mimicking stock repurchases and data on open market stock repurchases from 30 countries, we find that long-term operating and market performance following stock repurchases improve less for suspected mimicking firms. This finding contradicts the conventional characterization that managers use stock repurchases to signal undervaluation and enhanced future performance. We find that mimicking firms have smaller capital investments, need greater external financing, buy back fewer shares, and issue more new shares (and/or resell more treasury shares) in the year of the repurchase. Our analysis further shows that mimicking is more likely in countries with weak investor protections and in firms with higher ownership concentration. Further, mimicking associated with concentrated ownership is mitigated in countries with stronger investor protections and by the adoption of International Financial Reporting Standards (IFRS). Altogether, our findings provide evidence of signal mimicking in stock repurchases in international data that is influenced by market, ownership, legal, and financial reporting characteristics of countries.

Corporate Finance Multidimensional Signaling Games: Theory and Evidence

The research question of this dissertation concerns the interaction between multiple corporate finance signaling devices and multidimensional private information. First, while traditional corporate finance theories and empirical works are concerned with the question of whether an activity serves as a signaling device, I provide an analytical tool for answering a more subtle question: To what extent does an activity serve as such a device? In order to answer this question, this study introduces a novel concept: the contribution of a signaling device to the informativeness of equilibrium - where informativeness is the degree to which the market can differentiate between firms. Second, this study examines an additional channel of indirect signaling, where one device conveys information regarding the marginal rate of substitution of a second device. This framework leads to new theoretical insights, for example, the notion that an activity may serve as a signaling device, even if its costs are positively correlated with firm quality. I provide novel empirical evidence, regarding the signaling interaction of two long-debated practices - open market stock repurchases and insider trading. Consistent with my empirical predictions, I find evidence that (a) the market reaction to share repurchases depends on the amount of information conveyed by changes in mangers’ holdings, (b) future operating performance is quasi-concave in managers’ net purchases and firms’ actual repurchases, (c) non-monotonicity of share repurchases in future operating performance (d) share repurchases are followed by increase in firm risk and (e) when accompanied with share repurchases, managers’ holdings increase with future firm risk.

The effects of ownership and stock liquidity on the timing of repurchase transactions

We analyze detailed monthly data on U.S. open market stock repurchases (OMRs) that recently became available following stricter disclosure requirements. We find evidence that OMRs are timed to benefit non-selling shareholders. We present evidence that the profits to companies from timing repurchases are significantly related to ownership structure. Institutional ownership reduces companies' opportunities to repurchase stock at bargain prices. At low levels, insider ownership increases timing profits and at high levels it reduces them. Stock liquidity increases profits from timing OMRs.

The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions

We analyze detailed monthly data on U.S. open market stock repurchases (OMRs) that recently became available following stricter disclosure requirements. We find evidence that OMRs are timed to benefit non-selling shareholders. We present evidence that the profits to companies from timing repurchases are significantly related to ownership structure. Institutional ownership reduces companies’ opportunities to repurchase stock at bargain prices. At low levels, insider ownership increases timing profits and at high levels it reduces them. Stock liquidity increases profits from timing OMRs.

Institutional investment horizons and open-market stock repurchases: evidence from the Taiwan stock market

This article investigates how the investment horizon of a firm's institutional shareholders affects the outcome of stock repurchase. Our results show that repurchasing firms with long-term institutional investors experience significantly positive abnormal returns around the repurchasing announcements, actually buy back more shares during the execution period, and perform better over a subsequent 3-year period than repurchasing firms with short-term institutional investors. These findings suggest that repurchasing firms held by long-term institutional investors can acquire certification- and monitoring-related benefits, thus providing more credible signals about the true value of firms.

BOND MARKET REACTION TO STOCK REPURCHASES: IS THERE A WEALTH TRANSFER EFFECT?

We reexamine the bondholder wealth impact of stock repurchases with a focus on the wealth transfer effect. We do not detect any transfer of wealth from bondholders to shareholders surrounding open market stock repurchases. For the overall sample (1994–2002), using daily data we document a significant decrease in bond yields surrounding repurchase announcements. Subsamples classified by attributes that capture wealth transfer propensity also do not reveal evidence consistent with a wealth transfer effect. Correlation analysis between bond and stockholder wealth effects similarly is not supportive of a wealth transfer effect. Contrary to the wealth transfer hypothesis, we document a greater proportion of bond rating upgrades than downgrades in the three months following a repurchase announcement. Our results are robust to alternate bond price data and event return methodology.

Stock repurchases: How firms choose between a self tender offer and an open-market program

In practice, open-market stock repurchase programs outnumber self tender offers by approximately 10–1. This evidence is puzzling given that tender offers are more efficient in disbursing free cash and in signaling undervaluation – the two main motivations suggested in the literature for repurchasing shares. We provide a theoretical model to explore this puzzle. In the model, tender offers disburse free cash quickly but induce information asymmetry and hence require a price premium. Open-market programs disburse free cash slowly, and hence do not require a price premium, but because they are slow, result in partial free cash waste. The model predicts that the likelihood that a tender offer will be chosen over an open-market program increases with the agency costs of free cash and decreases with uncertainty (risk), information asymmetry, ownership concentration, and liquidity. These predictions are generally consistent with the empirical evidence.

An Empirical Study of the Differential Market Reaction to Open-Market Stock Repurchase Announcements

<p class="MsoBodyText2" style="text-align: justify; margin: 0in 0.5in 0pt; tab-stops: .5in;"><span style="font-size: 10pt;"><span style="font-family: Times;">Significant positive stock price reaction to stock repurchase announcements has been well documented in the finance literature.<span style="mso-spacerun: yes;">  </span>Most studies on repurchase focus on the average positive reaction; however, 30 percent of the repurchasing firms experience negative abnormal returns at announcement.<span style="mso-spacerun: yes;">  </span>This study examines the apparent heterogeneity in the stock price reaction to stock repurchase.<span style="mso-spacerun: yes;">  </span>The results show that the market reaction to repurchase announcements is determined by firm specific factors and is based on the overall costs and benefits analysis by the market of the stock repurchase program.<span style="mso-spacerun: yes;">  </span>The results are consistent with conventional signaling models and agency theories.</span></span></p>