Stock Repurchases Research Articles

Three effects of stock repurchase on rival firms in Vietnam

Purpose The purpose of this paper is to examine the effects of share repurchase announcements on the stock price of rival firms in the same industry in Vietnam during 2010–2017. Design/methodology/approach Both event study and t-test are employed to test the effects of share repurchase announcements on rival firms. In addition, cross-sectional analysis by ordinary least square regression is also applied for investigating the heterogeneous effects due to information transfer. Findings The finding shows that stock repurchase announcements result in a positive and significant valuation effect for both announcing firms and rival firms in Vietnam. Furthermore, the degree of signal to the industry is conditional on the degree of signal about the announcing firms as a contagious effect. Intra-industry effects are more favorable when profit performance of rival firms is good and when leverage of rival firms is low. Practical implications Rival firms can seize opportunities surrounding share repurchase announcements in the same industry in Vietnam. However, due to firm characteristics, intra-industry effects of stock repurchases differ among industries. Originality/value By examining different methods, the paper attributes valuable results to investigate the stock price behavior of rival firms in the same industry when firms announce stock repurchase in Vietnam.

The Opportunity Cost of Share Repurchases

In 2018, firms repurchased more than $1 trillion of their own shares for the first time. Given the enormous scale of this resource allocation away from investment in innovation and growth and toward shareholders, it is reasonable to consider if these buybacks create opportunity costs. Stock buybacks increase earnings per share, even in the wake of no earnings growth, driving up share price and benefitting the top executives who make these capital allocation decisions by increasing the value of their stock options. Pundits disagree on the impact that high levels of buybacks have on the economy, some arguing that stock buybacks come at the expense of strategic investment in innovation while others point to growth in private sector R&D in the past decade as evidence that firms have enough cash to innovate and repurchase shares simultaneously. In this paper, I empirically test whether share buybacks are suppressing corporate innovation in ways that control for widely observed declines in returns to R&D investment, and the endogenous relationship between stock buybacks and innovation. I provide strong evidence that share buybacks are, indeed, suppressing corporate innovation. This has enormous ramifications to the long term viability of American industry and to social justice.

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.

The Rise of Stock Buybacks: Investigating the Impact of Common Ownership, Activism, & Shortselling

The Rise of Stock Buybacks: Investigating the Impact of Common Ownership, Activism, & Shortselling

Do Short-Term Incentives Affect Long-Term Productivity?

Previous research shows that stock repurchases that are caused by earnings management lead to reductions in firm-level investment and employment. It is natural to expect firms to cut less productive investment and employment first, which could lead to a positive effect on firm-level productivity. However, using Census data, we find that firms make cuts across the board irrespective of plant productivity. This pattern seems to be associated with frictions in the labor market. Specifically, we find evidence that unionization of the labor force may prevent firms from doing efficient downsizing, forcing them to engage in easy or expedient downsizing instead. As a result of this inefficient downsizing, EPS-driven repurchases lead to a reduction in long-term productivity.

Shareholders' Equity at Pepsico

This case provides instructors with an opportunity to discuss some of the fundamental aspects of a typical public company's shareholders' equity financial reporting and financial disclosures. As such, students are provided with information pertaining to PepsiCo's common stock, preferred stock, stock repurchases, cash dividends, stock splits, and GAAP earnings per share (EPS) versus non-GAAP EPS. In addition, the case also provides an interesting bit of information regarding PepsiCo's 2017 move from the NYSE to the Nasdaq. Excerpt UVA-C-2425 May 28, 2019 Shareholders' Equity at PepsiCo Having just finished her afternoon run, Joan Dunkirk opened a bottle of Aquafina and took a sip to quench her thirst as she sat down to scan the financial news online. She noticed that PepsiCo had released a summary of 2018 results. She skimmed the summary and noted PepsiCo's expectations about dividends and share repurchases for 2019: The Company today announced a 3 percent increase in its annualized dividend per share to $ 3.82 from $ 3.71 per share, effective with the dividend expected to be paid in June 2019. This represents the Company's 47th consecutive annual dividend per share increase….For 2019, the Company expects…total cash returns to shareholders of approximately $ 8 billion, comprised of dividends of approximately $ 5 billion and share repurchases of approximately $ 3 billion. Dunkirk wasn't quite sure why companies would buy back their own stock. She bought stock when it was a good deal, making money on it by either collecting the dividends the company paid and/or holding onto the stock while the stock price increased and then selling it later. But she wasn't sure whether, or how, her logic translated to management's thinking when they decided to buy back a company's stock. . . .

Equating U.S. Tax Treatment of Dividends and Capital Gains for Foreign Portfolio Investors

The U.S. tax law equates the tax rate on dividends and long‐term capital gains on stock owned by U.S. citizens and residents. However, the taxation of these two types of rewards in the hands of foreign portfolio investors remains dramatically different from each other, with the capital gain being fully exempt. Several reasons support this article's proposal to no longer exempt these gains. Extending finance theory and prior normative tax research, this article argues that foreigners’ portfolio dividends and capital gains should be taxed in the same manner because they are economically equivalent and emanate from the same source. Three recent empirical developments also support repeal of the foreigner's exemption. First, there is now extensive use by U.S. corporations of stock repurchases—which are taxed to selling shareholders as capital gain—as a form of corporate payout that was in the past primarily accomplished through dividends. Second, foreign ownership of U.S. stocks has continued to increase, with an estimated one‐third of these stocks owned by foreigners. Third, the modern tax compliance environment—including aspects of the Foreign Account Tax Compliance Act that apply to foreigners—reduces past congressional and academic concerns about enforcing the taxation of foreigners’ portfolio gains.

Refinement of the FCF motive for stock repurchases

PurposeThe purpose of this paper is to investigate factors that influence the free cash flow (FCF) motive for stock repurchases. Specifically, it examines whether the positive association between FCF and open-market repurchases is partially driven by abnormal cash flows, and whether external analyst monitor and financial crisis influence the association.Design/methodology/approachThe study employs a tobit regression model to test the hypotheses.FindingsFirst, the results suggest that the positive association between FCF and stock repurchases is partially driven by abnormal cash flows. Second, the association between pre-managed FCF and stock repurchases is strengthened as more analyst following the firms. Third, firms repurchase less when they report more negative abnormal cash flows, and that tendency is more pronounced during the 2008 financial crisis period. Further analysis shows that during the crisis period, the effect of negative abnormal cash flows on operating performance gets stronger.Originality/valueThe study makes several contributions to the literature. This paper is the first to show that managers use abnormal cash flows to fulfill the share buy-backs. In addition, it shows that analysts provide effective external monitoring by strengthening the association between pre-managed FCF and repurchases. Furthermore, it finds that firms adjust their strategy in times of financial crisis period in response to the increased risk. Finally, it contributes to the earnings management literature by showing the differential effects of accruals management and cash flow management on earnings performance.

R-square로 측정한 시장과의 동시성이 자사주매입공시 수익률에 미치는 영향

본 연구는 RSUP2/SUP 로 측정한 시장과의 동시성이 자사주매입공시 수익률에 미치는 영향을 분석하였다. 주가에 내재되어 있는 기업의 사적 정보가 많을수록 시장에 대한 동시성이 떨어져서 시장모형의 결정계수인 RSUP2/SUP 값이 낮게 나타나는데, 기업의 RSUP2/SUP 값이 낮을수록 자사주매입 공시에 대한 시장의 추가적인 정(+)의 반응이 있을 것이라는 판단을 검증하고자 한다. 연구의 주요 결과는 다음과 같다. 첫째, 분석대상 기업들은 자사주매입 공시 직후에 유의한 양의 비정상수익률이 나타났다. 둘째, 분석대상 기업들은 자사주 매입 공시 후 3개월간 유의한 양의 초과수익률을 보였으며 RSUP2/SUP 값이 낮을수록 초과수익의 정도가 높게 나타남을 보였다. 마지막으로, 분석대상 기업들은 자사주매입 공시 후 t+1 년에 MB비율로 측정한 기업가치의 유의미한 상승을 보였고, 기업군의 RSUP2/SUP 값이 감소할수록 기업가치의 증가량은 더 커짐을 보였다.BR 이상의 분석 결과들이 기업의 사적 정보가 많다는 요인이 자사주 매입 공시 이후의 초과수익을 유도했음을 보이고 있고, RSUP2/SUP로 측정한 시장과의 동시성이 기업의 사적 정보와 미래 주식수익률에 대한 종합적인 지표로 사용 가능함을 보였다는 점에서 의미가 있다.

Sacrificing corporate investment for stock repurchases: Are family firms different?

Recent changes to the US tax code have increased stock repurchases by US firms. Critics state and existing research provides evidence that firms forego valuable investment to repurchase stock for short-term stock price increases, benefiting managers whose compensation is closely tied to the firm's stock price. Firms for which the founding family is involved have been shown to have longer horizons regarding investment decisions. This study examines the repurchase and investing behavior of 827 firms for the period 2006 through 2015. The results provide evidence that firms decrease investment in employment and research & development concurrently with stock repurchases. Family firms, however, are less likely to repurchase shares during the period and, when they do, have a lower propensity to decrease investment in capital expenditures, employment, and research & development compared to firms that do not have a founding family presence.

Effect of Stock Price Information on Timing of Share Repurchases

Objective - This study investigates whether private information newly incorporated into stock price enhances performance in timing share repurchases. Methodology/Technique - Cost saving gained in share repurchases is used a proxy for performance of market-timing in share repurchases and firm-specific stock return variation is used to gauge stock price informativeness. A sample of 334 U.S. repurchasing firms are tested using panel data regression. Findings - The paper concludes that managers possess better market timing skill by obtaining more cost saving from their share repurchases when private information is reflected in stock price. Stock price informativeness may be the tool for managers to improve their market timing skill to take advantage of the stock market. Furthermore, firms with smaller size and a higher market-to-book ratios, and firms with higher cash-to-assets ratios are found to achieve more cost saving in buying back their shares indicating that these firms are able to time the market in share repurchasing. Novelty – Despite numerous previous studies focusing solely on using share repurchases announcement for computing cumulative abnormal returns in testing managerial market timing, this study contributes to the literature in several ways: (i) providing evidence relating stock price informativeness and performance of market-timing in share repurchases; (ii) developing a better timing measure constructed using actual repurchasing data; (iii) adopting a cost saving measure as the timing measure instead of cumulative abnormal return. Type of Paper - Empirical. Keywords: Managerial Learning Hypothesis; Market Timing; Stock Repurchase; Stock Price Informativeness; Firm-specific Stock Return Variation. JEL Classification: G12, G13, G14. DOI: https://doi.org/10.35609/jfbr.2019.4.1(5)

Share repurchases and accounting conservatism

The prior literature indicates that financial policy (e.g., payout policy) as well as accounting policy (e.g., conservatism) can be used to address incentive problems in firms but finds mixed evidence. We conjecture that stock repurchases, an increasingly popular form of payout, and conservatism are potential mechanisms to counter managerial propensity to engage in overinvestment using free cash flows. Consequently, we expect a negative relation between repurchases and conservatism as well as a stronger negative relation between these two mechanisms in firms with high levels of free cash flows. We find results consistent with these expectations. By contrast, we find a weaker negative relation between repurchases and conservatism when CEO tenure is higher, which confirms that more entrenched CEOs have less incentives to solve the overinvestment problem.

Analysis Of Corporate Actions And Effect On Stock Trading The Indonesia Stock Exchange

This study aims to look at the effect of the corporate action against trading on the Stock Exchange be something interesting to do research on five companies that perform corporate actions. Data were analyzed using descriptive methods and comparative analysis of the event study method with a different test two parties. Event windows use 15 days prior to the corporate action and 15 days after the corporate action. Results of research on five companies that perform corporate actions earned actions stock buy-backs, stock-dividend and stock split no significant effect on actual returns after the announcement date. On the trading frequency, action stock-buyback have significant differences, whereas stock dividend and stock-split not. On average trading value, action stock-dividend and stock-buyback not any significant difference, while stock-split showed a significant difference. The study results are not normal events of their return on stock dividends 7 days after the date of announcement of the action stock-split-return normal not occur on days 3 and 4, while on the corporate action buy-back not occur. Stock-dividend while the information content contained in stock-split and buy-back did not show a significant investor reaction.

The Early Returns to International Hedge Fund Activism: 2000–2010

In this summary of their recent article in the Review of Financial Studies, the authors provide an overview of the methods and findings of the first comprehensive study of worldwide hedge fund activism—one that examined the effectiveness of some 1,740 separate “engagements” of public companies by 330 different hedge funds operating in 23 countries in Asia, Europe, and North America during the period 2000‐2010.The study reports, first of all, that the incidence of shareholder activism is greatest in companies and countries with high institutional ownership, particularly U.S. institutions. In virtually all countries, with the possible exception of Japan, large holdings by institutional investors increased the probability that companies would be targeted by activists. Nevertheless, in all countries (except for the United States), foreign institutions—especially U.S. funds investing in non‐U.S. companies—have played a more important role than domestic institutional investors in supporting activism.The authors also report that those engagements that succeeded in producing “outcomes” were accompanied by positive and significant abnormal stock returns, not only upon the announcement of the activist's block purchase, but throughout the entire holding period. “Outcomes” were identified as taking one of four forms: (1) increases in dividends or stock buybacks; (2) replacement of board members; (3) corporate restructurings such as sales or spinoffs of businesses; and (4) takeover (or sale) of the entire company. But if such outcomes were associated with high shareholder returns, in the many cases where there were no such outcomes, the eventual, holding‐period returns to shareholders, even after taking account of the initially positive market reaction to news of the engagement, were indistinguishable from zero.The authors found that activists succeeded in achieving at least one of their proposed outcomes in roughly one out of two (53%) of the 1,740 engagements. But this success rate varied considerably across countries, ranging from a high of 61% for North American companies, to 50% for European companies, but only 18% engagements of Asian companies—with Japan, again, a country of high disclosure returns but unfulfilled expectations and disappointing outcomes. Outcomes also tended to be strongly associated with the roughly 25% of the total engagements that involved two or more activists (referred to as “wolfpacks”) and produced very high returns.

Save the Buyback, Save Jobs

In response to a recent New York Times op‐ed by Senators Schumer and Sanders deploring the effects of stock buybacks on workers and the economy, the authors explain the role of buybacks in increasing corporate productivity and in recycling “excess capital” from mature companies with limited growth and employment opportunities to the next generation of Apples and Amazons. Some companies, as Schumer and Sanders charge, are guilty of repurchasing shares in the name of “shareholder value maximization” instead of pursuing job‐creating investments. But as the authors argue, well‐run companies increase shareholder value not by boosting EPS through buybacks, but mainly by earning competitive returns on capital and investing in their long‐run “earnings power.” And by paying out capital they have no productive uses for, such companies give their own shareholders the opportunity to reinvest in other companies with promising prospects for growth and jobs.But the authors go on to note the tendency of companies to buy back shares not when their stock prices are low, but instead when the companies are flush with cash and nearer the top than the bottom of the business cycle. The result of this tendency, as research by Fortuna Advisors (the authors' firm) shows, is that fully three quarters of companies doing large buybacks during the period 2013‐2017 failed to produce an adequate “Buyback ROI,” a metric developed by Fortuna that indicates management's effectiveness in “timing” its stock repurchases.Given the usefulness of buybacks in recycling capital, the authors conclude that the most reliable solution to the corporate short termism and underinvestment problem is for companies to adopt better financial performance measures—including Buyback ROI—to guide their capital allocation. And when management determines that it has significantly more capital than value‐adding investments, but wants to avoid committing to unsustainable dividend increases, it should consider buybacks—but only if management is convinced that its stock price has not outpaced performance.

The Cost of ASR's - Part VII - Apple Case Study

In 2013-2017, Apple entered into 12 accelerated stock repurchase agreements (“ASR’s”) through which it repurchased, split adjusted, 693.3 million shares at $102.41 apiece for a total of $71.0 billion. Apple paid $4.023 billion (6.01%) more than if it had just made open market repurchases in those months in lieu of entering into ASR’s. Some might argue that, compared to a tender offer, which requires a steep premium, an ASR is cheap and, given volume restrictions on open market repurchases, a tender offer would have been Apple’s only alternative to ASR’s. The data does not appear to support that view. Some might say the market could not digest more open market repurchases. The data does not support that either. ASR’s spread cost over time. A company whose future share price is heading higher will find an ASR relatively costly, and that was exactly Apple’s experience with ASR’s when its share price was in an uptrend.

Stock Market Short-Termismms Impact

Stock-market-driven short-termism is crippling the American economy, according to legal, judicial, and media analyses. Firms forgo the R&D they need, cut capital spending, and buy back their own stock so feverishly that they starve themselves of cash. The stock market is the primary cause: directors and executives cannot manage for the long-term when their shareholders furiously trade their company’s stock, they cannot make long-term investments when stockholders demand to see profits on this quarter’s financial statements, they cannot even strategize about the long-term when shareholder activists demand immediate results, and they cannot keep the cash to invest in their future when stock market pressure drains away that cash in stock buybacks. This doomsday version of the stock-market-driven short-termism argument entails economy-wide predictions that have not been well-examined for their severity and accuracy. If the scenario is correct and strong, we should first see sharp increases in stock trading in recent decades and more frequent activist interventions, and these increases should be accompanied by (1) sharply declining investment spending in the United States, where large firms depend on stock markets and where activists are important, as compared to advanced economies that do not depend as much on stock markets, (2) buybacks bleeding cash out from the corporate sector, (3) economy-wide R&D spending declining from what it should be, and (4) a stock market unwilling to support innovative, long-term, technological firms. These are the central channels from stock market-driven short-termism to overall economic degradation. They justify corporate law policies that seek to prevent these outcomes. But these predicted economy-wide outcomes are either undemonstrated, implausible, or untrue. Corporate RD of a post-industrial economy doing more RD and of an economy whose investment intensity depends on overall economic activity, not stock market trading nor hedge fund activism. True, the economy-wide data could hide stock-market hits that hold back R&D from increasing more and that weaken American capital spending more than is fitting for a post-industrial economy. But if so, these have not been shown and several seem implausible. Hence, the calamitous form of the stock-market-driven short-termist argument needs to be reconsidered, recalibrated, and, quite plausibly, rejected. Then, last, comes the broadest question: why has a view that lacks strong economy-wide evidentiary support become the rare corporate governance issues that attracts attention from the media, political players, policymakers, and the public—and that is widely accepted as true? I suggest why in this paper’s final part.

Why Do Stock Repurchases Change Over Time?

Recent studies have shown the time trends of firm stock repurchase behavior. We examine these time changes for stock repurchase through the lens of real activities earnings management. Managers appear more likely to manipulate earnings through stock repurchases since the passage of the Sarbanes–Oxley Act (SOX) in 2002. Furthermore, suspect firms that just missed analyst earnings per share forecasts have higher incentives to manipulate earnings through stock repurchases. The results are not driven by changes in corporate governance associated with the passage of SOX. Overall, our results suggest earnings management can be a significant determinant of the dynamics of stock repurchases.

Share Repurchases and Accounting Conservatism

The prior literature indicates that financial policy (e.g., payout policy) as well as accounting policy (e.g., conservatism) can be used to address incentive problems in firms but finds mixed evidence. We conjecture that stock repurchases, an increasingly popular form of payout, and conservatism are potential mechanisms to counter managerial propensity to engage in overinvestment using free cash flows. Consequently, we expect a negative relation between repurchases and conservatism as well as a stronger negative relation between these two mechanisms in firms with high levels of free cash flows. We find results consistent with these expectations. By contrast, we find a weaker negative relation between repurchases and conservatism when CEO tenure is higher, which confirms that more entrenched CEOs have less incentives to solve the overinvestment problem.

Thrifty firms and thriftless households are risks to growth

▀ Structural changes in savings behaviour by households and especially firms in advanced economies in recent years pose threats to global growth. Household savings may have been compressed by high wealth levels, pointing to the risk of a sharp rise in saving and fall in spending if asset prices correct. One positive compared to a decade ago, however, is that US personal saving is less depressed than then. ▀ The bigger risk is arguably on the corporate side, where firms' net savings have risen on average by 2–3 percentage points of GDP since the early 1990s. This has been accompanied by weakening investment, especially in net terms. The reasons behind this are varied – post‐crisis caution, demographic factors and a shift to R&D intensive industry may all have played a role. But a key factor is likely to have been changes in incentives facing executives, leading them to prioritise stock buybacks over investment. This risks creating a long‐term low‐growth feedback loop.