Repurchase Plans Research Articles

Research on the Motivation and Effect of "Deceptive" Share Repurchase—Take Orient Group Incorporationas an Example

With the continuous improvement of China's share repurchase system, the policy optimization actively promotes the application of share repurchase in the capital market, and makes it become a common way for listed companies to manage market value. However, the problems presented by listed companies in the implementation of share repurchase plans have gradually been exposed, especially the frequent occurrence of "deceptive" repurchase, which has become the focus of the market. In order to solve this problem, China has issued detailed rules for the implementation of share repurchase, clearly emphasizing the prevention of "deceptive" repurchase, aiming at guiding listed companies to operate in compliance. However, due to the low cost of violation, most listings still fail to comply with the standards and continue to appear "deceptive" buyback behavior. Therefore, by analyzing the motivation of listed companies to implement "deceptive" share repurchase behavior and the economic consequences, this paper provides a warning for investors, urges listed companies to self-examine the share repurchase plan, and puts forward regulatory suggestions for the regulatory authorities to be optimized.

Why do undervalued firms repurchase shares? Evidence based on the market-timing effect in China

It is puzzling that few undervalued firms in China make repurchase announcements despite the value-adding motive of share repurchases. Inspired by this conundrum, this study explores the market-timing effect of repurchase signaling. Our sample consists of A-share listed firms that made stock repurchase announcements in China between 2005 and 2019, as well as their comparable peers obtained through the Mahalanobis distance matching. Changes in market indices before and after the repurchase announcements are used to measure overall market timing, followed by regression analyses. We find a positive relationship between post-announcement price reactions and market performance measures, suggesting that firms time repurchase announcements based on historical pricing information as well as overall market trends. We further propose that firms' timing capabilities are honed through attention to the capital market, which significantly increases the willingness to announce repurchase plans. Our findings help to explain why firms in China with undervalued shares make repurchase announcements.

Formulating a Dividend Policy for a Firm

This study seeks to identify key factors in formulating a dividend policy for a firm. We revisit the theory of stock valuation and identify and explore the impact of critical factors on a firm’s dividend policy. Next, we develop a framework and investigate financial data requirements to formulate such a policy and illustrate a methodology with an example of a case study for a firm which had never paid dividends but plans to change its policy. We recommend further research into issues in development and implementation of a firm’s stock repurchase plan in lieu of or to complement a dividend policy.

Hedge Strategy Analysis and Financial Analysis of Yunnan Baiyao

Plenty of companies actively employ financial instruments to hedge looming risks. Although hedging may reduce risks such as exchange rate risk and potential price risk, hedging is also likely to make companies suffer from loss. Options, one of the financial derivatives, bring holders rights instead of obligation to buy or sell the underlying asset at a fixed price. In 2020, Yunnan Baiyao declared that the group intended to conduct stock buybacks hedge the stock price risk of its repurchase plan. The cost of buyback was reduced in that this repurchase plan was combined with OTC put options. Yunnan Baiyao is the leading company in the pharmaceutical and health industry and its market value reached ￥134.24bn which ranked second among its peers as of 2021. Based on this stock purchase plan of Yunnan Baiyao, this article aims to analyze the financial situation of the company and the application of put options in the plan.

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.

Tax Reform Made Me Do It!

This paper examines corporations’ actions, and statements about actions, following the tax law change known as the Tax Cuts and Jobs Act (TCJA). Specifically, we examine four different outcomes — bonuses (or other actions that benefit workers), announcements of new investments, share repurchases, and dividend announcements. We find that 4% of public firms in our sample announced in Q1 2018 they would pay some portion of their tax savings toward workers. In terms of investment, we find that 22% of the S&P 500 firms in our sample mentioned in earnings conference calls that they would increase investment because of the TCJA. We find a general increase in share repurchases following the passage of the TCJA, but the increase is extremely concentrated in a small number of firms. We find only nine firms that announced a new share repurchase plan explicitly attributed the new plan to the TCJA. In regression analysis, we find that both political and economic variables explain TCJA-linked announcements. The analysis suggests that firms with greater expected tax savings from the TCJA are those most likely to announce payments to workers and plans to increase investment. Firms with a Political Action Committee that donates more to Republican candidates are also more likely to announce benefits to employees.

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.

Energy Recovery unveils share repurchase plan

Energy Recovery Inc's board of directors has approved a share repurchase program that authorizes the company to purchase up to US$10 million of its outstanding common stock.

Payout Policy Trade-Offs and the Rise of 10b5-1 Preset Repurchase Plans

We are the first to document and study the use of Rule 10b5-1 preset repurchase plans. Though the rule’s original intent was to clarify conditions for enforcing insider trading laws, generally thought to apply to individuals classified as firm insiders, we find strong use of the rule at the firm level to repurchase company stock. We exploit this new and widespread form of payout to examine an issue at the core of payout decisions—the trade-off between commitment and financial flexibility. Relative to open market repurchases, preset plans provide an expanded repurchase window and increased legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption: Firms with alternative sources of financial flexibility are more likely to precommit to a repurchase plan, as are firms with a history of poor repurchase timing and firms constrained by blackout windows. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates, with more positive market reactions, and with more dividend substitution than open market repurchases. Lastly, we find that preset repurchase plans represent a unique payout tool whose introduction encouraged a different set of firms to buy back stock and significantly altered the payout landscape. This paper was accepted by David Simchi-Levi, Finance.

Mandatory Disclosure and Firm Behavior: Evidence from Share Repurchases

ABSTRACT This paper examines changes in corporate behavior around the 2003 modification to SEC Rule 10b-18, which mandates enhanced disclosure of repurchase transactions. Firms announce significantly fewer and slightly smaller open market repurchase plans in the enhanced disclosure environment. However, completion rates (the amount of stock repurchased as a percentage of the announced amount) significantly increase. More conservative announcement strategies and more aggressive completion rates are consistent with a decline in false signaling. Indeed, open market repurchase announcements are viewed as more credible, on average, in the enhanced disclosure environment; after controlling for firm characteristics, cumulative abnormal announcement returns are significantly greater in the high disclosure period. As with any analysis based on a regulatory change affecting all firms simultaneously, other unobservable, macroeconomic trends could have affected repurchase behavior. Nonetheless, these results are consistent with significant changes in corporate behavior around new mandatory disclosures. JEL Classifications: G14; G30; G35; G38; M48; K22

Preset Repurchase Plans and SEC Rule 10b5-1

Preset Repurchase Plans and SEC Rule 10b5-1

Us Dividend Policy Analyses

The main issue writer examines in this writing is to analyze whether or not dividend policy is a determinant to maintain stock values or firm values as a whole. It is essential that dividend policy is managed properly to enhance the satisfaction of the investors at any level of characteristics. At the end, investors are the key that determines the stock value movement. Some investors are looking for capital gain and some do care about dividend payout. Thus, the decision of dividend policy becomes crucial. It needs to understand that a firm's dividend policy may have effects on shareholder welfare. The answers can be found out by analyzing different factors of dividend policy. Taken as a whole, to see if there are other alternatives if dividend policy that can maintain or even boost up firm values. Different dividend policy has some upsides and downsides that a corporation needs to consider. One of the alternatives that is common and has become a key is stock repurchase plan.

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.

Misperceiving the Beliefs of Others: How Pluralistic Ignorance Contributes to the Persistence of Positive Security Analyst Reactions to the Adoption of Stock Repurchase Plans

We consider how a social psychological bias referred to as pluralistic ignorance occurs among security analysts and how this bias may lead to behavioral conformity and isomorphism in analysts' reactions to the adoption of a particular organizational policy, namely, stock repurchase plans. Our theory suggests why (1) there may be a systematic tendency for analysts to underestimate the extent to which other analysts share their reservations about repurchase plans (i.e., reservations about whether plans reflect well on the performance prospects of adopting firms), such that (2) analysts conform to other analysts and issue more positive earnings forecasts and stock recommendations in response to the adoption of repurchase plans despite having private reservations about whether the plans reflect well on adopting firms. We also contend that analysts are less likely to underestimate the extent to which others share their reservations about repurchase plans to the extent that they have frequent communication ties to other analysts. Whereas prior neoinstitutional research on conformity and isomorphism has primarily adopted a cognitive perspective in which actors conform to the behavior of others based on their understandings of a particular policy or practice (i.e., they take the value of the policy for granted or infer the value of the policy from others' prior decisions), we develop a social psychological perspective on isomorphism wherein actors imitate others based on their biased perceptions of others' beliefs about the policy. We also extend perspectives on institutional persistence by explaining why constituents may continue to publicly endorse a policy despite having private reservations about the policy's efficiency benefits.

Mandatory Disclosure and Firm Behavior: Evidence from Share Repurchases

This paper examines changes in corporate behavior around the 2003 modification to SEC Rule 10b-18, which mandates enhanced disclosure of repurchase transactions. Firms announce significantly fewer and slightly smaller open market repurchase plans in the enhanced disclosure environment. However, completion rates (the amount of stock repurchased as a percentage of the announced amount) significantly increase. More conservative announcement strategies and more aggressive completion rates are consistent with a decline in false signaling. Indeed, open market repurchase announcements are viewed as more credible on average in the enhanced disclosure environment; after controlling for firm characteristics, cumulative abnormal announcement returns are significantly greater in the high disclosure period. As with any analysis based on a regulatory change affecting all firms simultaneously, other unobservable, macroeconomic trends could have affected repurchase behavior. Nonetheless, these results are consistent with significant changes in corporate behavior around new mandatory disclosures.

Do Stated Corporate Stock Repurchase Motives Impact Stock Repurchase Plan Results? Part II – KLA-Tencor Case Study

Do well-conceived stock repurchase plan motives correlate with good stock repurchase plan results? Do ill-conceived stated motives correlate with poor results? KLA-Tencor states it initiated a stock repurchase plan “…to reduce the dilution from KLA-Tencor’s employee benefit and incentive plans such as the stock option and employee stock purchase plans.” However, using stock buybacks to offset options dilution is unlikely to maximize the profitability of a stock repurchase program. At best, such a directive will result in a company repurchasing shares at the average price during a given period, and the directive may easily be interpreted in a fashion that causes a company to repurchase shares at far above the average price over time. Certainly, for the moment, the raw performance of KLA-Tencor’s stock repurchase program leaves something to be desired. From FY00 through FY10, KLA-Tencor paid $3.139 billion to repurchase 68.7 million shares at $45.69 apiece. Now trading at $32.81 apiece, KLA-Tencor’s buybacks during this period generated an $884.9 million economic loss, 28.2% of the cash invested, before consideration of foregone interest income. Absent buybacks, KLA-Tencor’s shares today would be trading more than 16.1% higher. Selling shareholders may have benefitted from KLA-Tencor’s buybacks, but, so far, ongoing shareholders definitely have not.As in an earlier study of National Semiconductor, KLA-Tencor’s stated buyback objectives (“offset dilution”, “distribute cash”) in combination with its buyback program’s subsequent raw performance (246th best among 276 companies surveyed) raise the question of whether ill-conceived stated motives for corporate stock repurchase programs correlate with poor stock repurchase program results. Do companies as a group run less effective stock repurchase programs when they cite “improve return on capital”, or “offset options dilution”, or “reduce excess cash” as operative buyback motives rather than a more logical goal – “repurchase undervalued shares”? Ideally, analysis of a company’s buyback program should consider adjusted performance, not just raw performance. The outline for a more definitive study is described.

Do Misdirected Corporate Stock Repurchase Motives Lead to Poor Stock Repurchase Plan Results? National Semiconductor Case Study

National Semiconductor states that its stock repurchase program’s goal is to contribute to increasing the firm’s return on invested capital for the benefit of shareholders and employees. Which measure of return on capital is National watching? A review of four return on capital ratios suggest most provide little or no guidance on the appropriate timing for buybacks, nor, in general, do they provide a good gauge of a buyback program’s success. We observe that, in a survey of 275 corporations with current equity market capitalization of about $1.0 trillion who executed $350 billion of buybacks during the past decade, the “raw performance” (impact on stock price) of National Semiconductor’s buyback program recently ranked 264th best. From FY00 through FY10, National paid $5.066 billion to repurchase 231.5 million shares at about $21.89 apiece. Now trading at about $13.75, those buybacks amount to a 37.2% loss ($1.883 billion) on the amount invested before consideration of foregone interest income. Absent those buybacks, National’s stock price would now be trading more than 57.2% higher. The poor raw performance of National’s stock repurchase program may be temporary. Indeed, given the company’s high margins and earnings, it seems possible National is now undervalued. If so, the reported raw performance of its buybacks will improve. Still, the only economic justification for a stock repurchase program is that the repurchased shares are undervalued. The key question is, does the poor raw performance of National’s stock repurchase program result from National’s misspecification of a reasonable economic objective? Did aiming to increase reported return on capital rather than to repurchase undervalued shares hurt National’s buyback performance? More generally, whether or not National’s stock price rebounds and its buyback performance statistics improve, do companies as a group run less effective programs when they cite “improve return on capital”, or “offset options dilution”, or “reduce excess cash” as motivating buybacks rather than a goal to “repurchase undervalued shares”? A review of National Semiconductor’s stated buyback objectives and its program’s results certainly raises this question, but a definitive answer must await a more extensive study.

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.

REIT Dividend Determinants: Excess Dividends and Capital Markets

The determinants of excess dividend payments above mandatory requirements in real estate investment trusts (REITs) are evaluated. Payment of excess dividends is related to factors associated with reduced agency costs, strong operating performance, the implementation of a stock repurchase plan and an ability to access short‐term bank debt. Recognizing that access to external capital is essential for long‐term growth, REITs manage dividend policy to allow for capital acquisition in the form of both equity and debt. The acquisition and use of short‐term bank debt provides REIT management flexibility in determining dividend policy.

Stock Buybacks and Their Association with Stock Options Exercised in the IT Industry

One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and financial reporting of stock options. In December 2004, the FASB issued Statement 123R, Share‐Based Payment, in the hope that the long process of revising the accounting and financial reporting for stock options will be put to rest. FASB Statement 123R requires the fair‐value‐based method of accounting for share‐based payments. In order to offset the dilutive effects of generous stock option compensation packages for employees, companies are seemingly participating in stock repurchase plans. In the past, stock buyback programs were viewed as a means of distributing excess cash flow to investors; however, it appears now that many companies are financing stock repurchases through the issuance of debt, which can significantly impact the financial flexibility of a company. So, why do companies engage in this behavior? One possible reason for stock buybacks is to reduce the dilutive effect of stock option plans. Companies have, however, disputed that there is a direct relationship between exercised stock options and stock buyback transactions. Nevertheless, several articles and studies have found that there is a relationship and the FASB seems to believe that there is an association between stock buybacks and stock options, as Statement 123R requires that companies disclose the relationship between stock buybacks and stock payment programs. Using a sample of technology firms, we find evidence of an association between exercised stock options and repurchase of stock.