Share Repurchase Announcements Research Articles

Market Micrsotructure Changes around Accelerated Share Repurchase Announcements

We investigate the impact on trading characteristics of firms when they announce share repurchases using a relatively new buyback method - Accelerated Share Repurchases (ASRs). We find that trading costs decrease and market quality improves following an ASR announcement. The improvement in liquidity is not accompanied by significant changes in information asymmetry or price volatility. Multivariate tests show that the change in volatility and the presence of price constraints in the ASR agreement are significant in explaining the changes in spreads, but the reasons given by firms for conducting the ASRs are not. Thus, in the case of ASRs, the announced involvement of an investment bank buying shares on behalf of the firm improves liquidity without significantly affect the level of information asymmetry.

How Do Institutional Investors Trade When Firms are Buying Back Shares?

We study how institutional investors trade when firms buy back shares. We find that aggregate institutional ownership decline following share repurchase announcements. While some institutions sell shares passively to meet the firm demand for the market to clear, the overall institutional sell-off only accounts for 27% of shares bought back contemporaneously by firms. Many firms experience a net inflow of institutional investment. The decrease in institutional shareholding is greater in firms that experience weaker recent stock performance, display more information uncertainty, have higher institutional ownership, and conduct ill-timed/motivated repurchases that are not endorsed by institutions. And most of the sell-off comes from institutions active in trading. Institutional buying is more informative of the future returns than institutional sell-off, especially in firms with greater information asymmetry. But this return predictability decays over time. Our findings have important implications for firms’ cash payout policy and shed light on institutional trading behavior around voluntary corporate events.

Open‐Market Stock Repurchases by Insurance Companies and Signaling

AbstractThe signaling hypothesis of share repurchases implies that management uses repurchases to signal either that their firm's future operating performance will improve or that shares of their stock are simply underpriced by the market. This study examines which of the two interpretations can better explain open‐market share repurchase programs announced by insurance companies. We find no evidence that future‐operating performance of insurers improves following the repurchase announcement. In addition, changes in future operating performance cannot explain the announcement‐period abnormal return. Instead, the stock undervaluation prior to the repurchase announcement can significantly explain the announcement‐period abnormal return, particularly for life insurers. Overall, our results suggest that the positive market reaction to insurers’ open‐market share repurchase announcements is due to the stock undervaluation by the market, but not due to positive information content about future operating performance conveyed in the repurchase announcement.

The determinants of share repurchases in Europe

In this paper, we assess which firm-characteristics are associated with a firm's decision to announce a share repurchase programme in a cross-country framework. In the models, we incorporate firm-specific financial characteristics and measures of share price performance. We find that size, cash dividends, and ownership concentration consistently have a significant impact on share repurchase announcements in all three countries under study. However, the share price performance does not explain the decision to announce a share repurchase. The robustness of the proposed models is investigated across different dimensions of sample-matching methods and with a boot-strap technique. Finally, we construct a number of models with a robust predictive ability of a firm's likelihood to announce a share repurchase.

Does Corporate Governance Quality Lend Credibility to Open‐Market Share Repurchase Announcements?

AbstractManuscript TypeEmpiricalResearch Question/IssueLow‐quality firms may use share repurchase announcements to send a false or conflicting message regarding firm value to the capital market. This study examines whether firm‐level corporate governance mechanisms can alleviate this mimicking behavior by affecting managers' buyback behavior following open‐market share repurchase announcements. I further investigate the extent to which differences in corporate governance affect the changes in insider shareholdings and the degree of information content provided in repurchase announcements.Research Findings/InsightsUsing unique archival data from Taiwan, I find that the capital market reaction to share repurchases announced for the purpose of signaling undervaluation is more favorable for firms with quality corporate governance. The increasing post‐repurchase insider shareholdings confirm the credibility of repurchase announcements for firms with better corporate governance. The buyback outcome subsequent to repurchase announcements is affected by internal corporate governance mechanisms. Furthermore, external monitoring factors, such as having Big Four accounting firms as auditors, listing requirements, and regulatory preset buyback price ranges, also determine the execution rate of repurchase programs.Theoretical/Academic ImplicationsThe signaling hypothesis, the leading hypothesis on open‐market share repurchases, suggests that low‐quality firms may engage in mimicking behavior to send a false signal regarding firm value when the signal cost is low. This study provides insight regarding the impacts of firm‐level corporate governance structures on the signaling effects of repurchase announcements, the subsequent insider shareholdings, and the completion of repurchase programs. In addition, this study is the first to analyze the influence of corporate governance mechanisms on the degree of information content in open‐market share repurchase announcements.Practitioner/Policy ImplicationsThis study suggests that higher quality corporate governance mechanisms lend credibility to a firm's open‐market share repurchase announcement, which is also noteworthy in assessing the wealth effect of the repurchase announcements on shareholder value. Moreover, the findings suggest that buyback regulations (e.g., preset buyback price ceiling and floor) in Taiwan influence managers' buyback decisions.

Relation-based Versus Rule-Based Governance Systems

Relation-based Versus Rule-Based Governance Systems

Share repurchases of initial public offerings: motives, valuation effects, and the impact of market regulation

This study investigates the motives and valuation effects of share repurchase announcements of German firms during the 1998–2008 period, addressing the question why initial public offering (IPO) firms repurchase shares soon after going public. While our focus is on IPO firms, we also examine the impact of firm size by differentiating between IPO and established DAX/MDAX firms and by analyzing the source of surplus cash holdings, that is, either from equity issuances or from operating cash flows. We further explore the impact of the regulatory environment. Our empirical analysis reveals significant differences between the IPO and DAX/MDAX subsamples regarding their repurchase motives, stock price performance, and explanatory factors. Standard corporate payout theories are essential in explaining the different valuation effects. Our empirical analysis suggests agency costs of free cash flow as the main reason for the observed valuation effects of both IPO and DAX/MDAX firms, yet for different reasons. While DAX/MDAX firms continuously generate high operating cash flows before and after repurchasing shares, IPO firms exhibit low operating cash flows during the entire period but large surplus cash holdings due to the mandatory equity issuance at their public offering. Overall, the repurchase decisions of IPO firms are best explained by the agency costs of cash holdings and the unique rules and regulations of the German stock exchange.

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.

Dichotomous Expectations and Insider Trading Following Open Market Repurchases

The long-run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the “dichotomous expectations hypothesis” which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long-run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long-run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.

An application of multicriteria decision aid models in the prediction of open market share repurchases

This study presents the first attempt to develop classification models for the prediction of share repurchase announcements using multicriteria decision aid (MCDA) techniques. We use three samples consisting of 434 UK firms, 330 French firms, and 296 German firms, to develop country-specific models. The MCDA techniques that are applied for the development of the models are the UTilités Additives DIScriminantes (UTADIS) and the ELimination and Choice Expressing REality (ELECTRE) TRI. We adopt a 10-fold cross validation approach, a re-sampling technique that allows us to split the datasets in training and validation sub-samples. Thus, at the first stage of the analysis the aim is the development of a model capable of reproducing the classification of the firms considered in the training samples. Once this stage is completed, the model can be used for the classification of new firms not included in the training samples (i.e. validation stage). The results show that both MCDA models achieve quite satisfactory classification accuracies in the validation sample and they outperform both logistic regression and chance predictions. The developed models could provide the basis for a decision tool for various stakeholders such as managers, shareholders, and investment analysts.

Board of directors and insider trading with share repurchase programs

This study examines the relationship between insider trading and board of directors’ characteristics around stock repurchase announcements. It is hypothesized that information disparity between insiders and shareholders from share repurchases announcements creates opportunities for insiders to time their trading. However, there is little evidence on whether board characteristics reduce the probability of insider trading with repurchase announcements. Using data from firms listed on Forbes 500 between 1998 and 2004, we found that insider trading is related to share repurchase announcements. In order to focus on board of directors’ role, we controlled for board characteristics that may change the repurchase decision. Our results provide corroborative evidence of insider net selling around repurchase announcements and the advantages of board characteristics to offset insider trading. In particular, the results suggest that board tenure, directors’ ownership and board directorship change positively insider trading around repurchase announcements. Hence, Securities and Exchange Commission should consider rigorous restrictions on share repurchase announcements and be aware of potential influence of the corporate governance device.

Credibility of corporate announcements and market reaction: evidence from Canadian share repurchase programs

AbstractDo market participants evaluate the credibility of a firm's share repurchase announcement based on the firm's share repurchase history? Using a sample of 1,507 share repurchase programs for firms listed on the Toronto Stock Exchange from 1994 to 2005, we find that 69% of firms fail to acquire the target number of shares specified at announcement and many firms fail to repurchase any shares. We develop credibility indices and find a positive relationship between current announcement abnormal returns and completion credibility of previous announcements. We conclude that the market prices completion credibility of past share repurchase announcements in reacting to current repurchase announcements. Copyright © 2010 ASAC. Published by John Wiley & Sons, Ltd.

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.

The Determinants of Share Repurchases in Europe

In this research paper we employ a logit model methodology in order to identify the determinants of a firm’s decision to announce a share repurchase. In the models, we incorporate firm specific financial characteristics and measures of share price performance. Hence, we are able to estimate the probability of open market share repurchase announcements across Europe. The robustness of the proposed models is investigated across different dimensions of sample construction methods and with a boot-strap technique. We find that leverage, size, and ownership concentration, have a significant impact on the announcement of share repurchases in all three countries under study. Finally, we construct a number of models with strong predicting ability of a firm’s likelihood to announce a share repurchase.

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.

Managerial Responses to Initial Market Reactions on Share Repurchases

While most papers in finance literature investigate how the stock market reacts to announcements of corporate events, very few study the opposite, how namely, the manager responds to the information from outside investors. In this paper, we examine this issue, using open market share repurchases. Open market share repurchase offers flexibility for the manager to decide whether or not to buy back shares. Therefore, the manager may refer to the opinions of outside investors and make the decision, based on actual buyback activities. We propose learning, over-confidence and timing hypotheses to interpret the behavior of the managerial response to initial market reaction on the share repurchase announcement. Empirically, if a repurchase announcement abnormal return is low, then the manager tends to achieve the repurchase announced ratio by purchasing more shares. In addition, the investor will positively react to this repurchase in the long run. These empirical findings are consistent with the market timing hypothesis, which implies that managers know the true value of their firms better than the market at the moment of the share repurchase announcement.

The Market Valuation of Share Repurchases in Europe. A Cross Country Analysis

We analyse a uniquely constructed data set of share repurchases in France, Germany and the UK. We find significant differences across the three countries in the popularity of this strategy, in the market reaction and its determinants, and in the likelihood of subsequent share repurchase announcements. We show that in the UK, fundamental factors such as initial announcement, size, past returns, ownership concentration, and changes in regulations during our sample period explain the market reaction to the announcement of intention to repurchase shares. In the remaining countries, the excess returns are not persistent in the post-event period, and the fundamental factors do not consistently explain the market reaction and the probability of subsequent repurchases announcements. Our results suggest that institutional settings affect the value creation of share repurchases.

Share Issuance and Cross‐sectional Returns

ABSTRACTPost‐1970, share issuance exhibits a strong cross‐sectional ability to predict stock returns. This predictive ability is more statistically significant than the individual predictive ability of size, book‐to‐market, or momentum. Our finding is related to research that finds that long‐run returns are associated with share repurchase announcements, seasoned equity offerings, and stock mergers, although our results remain strong even after exclusion of the data used in these studies. We estimate the issuance relation pre‐1970 and find no statistically significant predictive ability for most holding periods.

Testing share repurchases hypotheses: a conditional study

In the past 20 years share buybacks have experienced a tremendous growth. Yet, we still don’t have a clear understanding of this phenomenon, also because of limited samples available on these corporate decisions. This paper aims at testing the main hypotheses on buybacks drivers and effects by analyzing the impact of share repurchase announcements on the performance of companies listed on the Italian Stock Exchange, conditional and unconditional on the 1998 introduction of the Capital Market Reform. Our findings show that, by imposing more stringent rules on transparency and equal treatment of shareholders in buybacks operations, the change in regulation has increased the volume and frequency of share repurchases announcements. Analogously, the number of repurchasing companies has soared as well. Finally, market reaction to buybacks, as measured by abnormal returns and cumulative abnormal returns has consistently reversed switching from negative to positive long term CARs

Share Repurchases and the Need for External Finance

We investigate the relationship between the need for external finance and the information content of share repurchases. We find that share repurchase announcement returns increase in the likelihood the firm will need to raise equity in the future. We then examine whether announcement returns to seasoned equity offerings (SEOs) differ when an open market share repurchase precedes the SEO. We hypothesize that repurchases may reduce asymmetric information regarding firm value. In this case, the repurchase mitigates the adverse selection problem associated with issuing equity, and the abnormal return to the SEO announcement should be less negative. We find significantly less negative abnormal returns when the SEO is preceded by a repurchase announcement. We document less negative SEO announcement abnormal returns when the SEO and repurchase announcements are closer in time. We find that compared to other repurchase firms, repurchase firms that are more likely to issue equity have better investment opportunities, have less internally generated cash flow, and face more severe financial constraints. We conclude that payout policy, in the form of stock repurchases, plays a significant role in conveying information about firm value.