Do Share Repurchases Distort Stock Prices? Evidence from the United States and Malaysia (original) (raw)
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Market Reactions to Share Repurchase Announcements in Malaysia
Asian Academy of Management Journal of Accounting and Finance, 2014
This paper examines share price behaviour surrounding share repurchase announcements in the context of information asymmetry and signalling hypothesis. We use event-type analysis to examine abnormal returns around three related repurchase announcements: announcement of the board’s decision, announcement of shareholder approval and announcement of actual share purchase. The results show that stock prices increase significantly in response to each of the three repurchase announcements, but there is no significant difference in the market reaction to firms that eventually make a repurchase versus firms that do not. We conclude that our results are consistent with the underpricing signalling hypothesis. Our results also show that small firms earn greater abnormal returns than large firms during each of the announcements, lending support to the information asymmetry hypothesis. Our multivariate regressions indicate that firm characteristics such as firm size, return on assets and the m...
Why do Firms Repurchase Shares? Evidence from Actual Share Repurchases
In practice, the share repurchase announcement is not a commitment to managers. To this end, the large difference between the actual and announced share repurchases is often observed in markets. In this paper, we explore the implications from actual share repurchase activities, different from the existing methods which focus on the announcements of share repurchases and hence largely ignore the managers' actual repurchasing activities. By considering actual share repurchases and controlling variables, the new empirical evidence found in this paper clearly supports the agency and investor divergence of opinion hypotheses, but not for the information asymmetry hypothesis.
Open Market Repurchases and Stock Price Informativeness: Evidence from Malaysia Stock Market
Journal of the Asian Academy of Applied Business (JAAAB), 2019
The aim of research paper is to examine the effect of stock price informativeness, which is conveyed by stock prices, on firm's open market repurchases (OMRs) activity. The finding of study is to provide evidence of presence of managerial learning whereby managers could use firm-specific stock return variation to buy back their shares via open market. Evidence is found in the subsample analysis where target sample is separated to two subsamples periods and test separately based on stock market performance. The finding of the 1 st subsample (Q12008-Q42013) for OMRs activity indicates that variation of stock return and firm size significantly and positively explains OMRs activity. The finding of 1 st subsample is robust in terms of random and fixed effect model. The finding implies that managers observed and learned information from firm-specific variation in stock return during financial crisis and recovery periods when performing open market repurchases.
Market Reaction to Actual Share Repurchase in Malaysia
This paper examines share price reaction surrounding actual share repurchases made by Malaysian listed firms from 2001 until 2005. Using event study methodology and the market model, the evidence indicates that a significant increase in share prices occurs in a three‐ day period beginning from the repurchase day. We also find evidence that there is a general price decline in the pre‐purchase period that suggests that firms made their repurchase after a period of consecutive price declines. This evidence clearly indicates the existence of a signalling effect and is consistent with the undervaluation hypothesis. It also indicates that the share repurchase programme can be used as an effective tool for price stabilisation.
Signaling and Substitution Hypotheses in Malaysian Share Repurchases
Management, 2013
There is an increasing trend of firms undertaking share repurchases in Malaysia, yet limited studies on repurchase activities have been published. This study attempts to examine managerial mot ives for repurchase in Malaysia using signaling and substitution hypotheses. Unlike firms in western countries, firms in Malaysia are bound by strict ru les and regulations before embarking on repurchases, thus it is argued that motives for share repurchases would be different fro m those of the developed markets. The results of this study are consistent with signaling hypothesis where Malaysian firms repurchase shares partly to signal undervaluation and better operating performance. They also buy back shares whenever there is an increase in cash flo ws. Ho wever, there is no evidence to support that these firms bought back shares to substitute dividend payments as documented by studies from western countries. In fact, repurchases are used to complement dividends. Further evidence shows that managerial ownership has significant influence on firms' repurchase decisions.
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.
The Wealth Effects of Share Repurchases in Malaysia
International Journal of Management Studies, 2013
This study aims to assess whether buyback activities in Malaysia are able to provide any economic benefits to shareholders both in the short-term and in the long-run. Specifically this study investigates the price effects on: (a) the announcement surrounding the repurchase intentions and implementation dates, (b) factors affecting the price effects on implementation dates and (c) long-run price effects subsequent to repurchase implementation. Using event study methodologies, this study finds no significant immediate price reactions surrounding repurchase intention dates. However, there is significant evidence of positive abnormal returns in days –5 to +5 surrounding the announcement of repurchase implementation. As for the factors affecting abnormal returns, this study finds that abnormal return responds positively to better prior price performance, dividend yield, directors’ holdings, and fraction of shares repurchased. However, abnormal return responds negatively to the previous a...
Why Do Firms Repurchase Their Stocks? Evidence from an Emerging Market
SSRN Electronic Journal, 2017
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.
The Price Impact and Timing of Actual Share Repurchases in Norway
SSRN Electronic Journal, 2021
Little is known about the price impact and timing of actual share repurchases. Data unavailability has hindered research in most countries, including the United States. Using unique data on actual share repurchase transactions from Norway, we test for the price impact and timing of daily open market repurchases. We find evidence that share repurchases typically follow after a negative drift in the stock price, and the average three-day abnormal return around the announcement is 0.54%. Moreover, the initial market reaction is greater for repurchases that are pursued by small firms and for firms that experience a negative drift in the stock price prior to the transaction. The evidence presented is seemingly indicative of managers' intent to signal undervaluation through repurchase transactions. However, we do not find any significant long-term abnormal returns for repurchasing firms. This result suggests that on average, managers do not time the market based on informational advantage.