A comprehensive examination of the wealth effects of recent stock repurchase announcements (original) (raw)
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What Drives the Declining Wealth Effect of Subsequent Share Repurchase Announcements?
SSRN Electronic Journal, 2017
Recent academic studies document that open market share repurchase announcements in the United States generate significantly lower returns than those reported in earlier studies. We find that the lower announcement return is associated with an increasing number of subsequent announcements in the more recent periods. Although the announcement period return from the initial announcement is positive, subsequent announcement returns are significantly decreasing. Further, we find that the decreasing returns of subsequent announcements are attributed to firms with negative past repurchase announcement returns. Our multivariate regression test results are consistent with the notion that the decreasing subsequent repurchase announcement returns are driven by hubris-endowed managers.
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.
The Determinants of Initial Stock Repurchases
2007
We present univariate and multivariate evidence to show that firms which engage in initial stock repurchases have some specific economic and financial attributes when compared to size-and industry-matched firms. We find that initial repurchase firms are younger, have lower leverage and operating risk, and higher payouts, operating cash flows, profitability and market-to-book than matched non-repurchase firms. Compared to secondary or "seasoned" repurchase matched firms, these initial repurchase firms are also younger and have higher cash, profitability, sales growth and market-to-book, as well as lower payouts, leverage and retained earnings. Therefore, we analyze the determinants and motivations that may explain why firms repurchase their own stock for the first time by studying the theoretical hypotheses found in the financial literature that are most important in explaining initial stock repurchases. The results support the free cash flow and risk reduction signaling hypotheses and the flexibility motivation for conducting stock repurchases. We do not find strong support for any other theoretical explanations of stock repurchases, such as undervaluation signaling, timing, tax effects and options and dilution hypotheses.
The Determinants of the Value Created by Stock Repurchase Programs
Revue Gouvernance, 2009
This paper aims to extend the empirical literature on the determinants of the value created by stock repurchase programs by analyzing the characteristics of the repurchase decision-making groups. Based on a sample of 200 US-listed firms from 1998-2004, the paper examines empirically the relationship between value created by stock repurchase programs and board of directors’ characteristics. The analysis depends on panel data analysis to consider unobservable fixed-effects in this relationship. The results provide evidence of a significant relation between board of directors’ characteristics and value created by the stock repurchase programs. The two important determinants are directors’ independence and directors’ outside experience. However, we find that this relationship changed significantly for some measures after the adoption of the 2002 Sarbanes-Oxley Act.
Do firms knowingly repurchase stock for good reason
Corporations are repurchasing stock in record numbers. The underling motive varies across firms, however a key underlying belief is that buybacks can enhance shareholder value. We reconsider the empirical evidence following repurchase announcements by focusing on whether managers repurchase stock in a manner consistent with increasing shareholder value. Overall, the long-horizon return drift following repurchase announcements is higher when managers buy back stock compared to when they do not, a result consistent with the undervaluation hypothesis. We also see high abnormal performance for buyback firms with high free cash flow, although overall support for this hypothesis as a source of gain is mixed. Managers do not, however, utilize their informational advantage for personal gain. This may be a consequence of the conservative trading restrictions and oversight that most firms now impose on manager behavior, thus reducing the informativeness of their trades around important corporate events.
Accelerated share repurchases: value creation or extraction
Review of Quantitative Finance and Accounting
The "signaling value, or more generally, the information content, of ASRs relative to conventional OMRs" remains unsettled in the literature (Farre-Mensa, Michaely, and Schwartz, 2014, p.125). Using a handcollected sample of 716 privately-negotiated Accelerated Share Repurchases (ASR) contracts from 2004 thru 2015, we find ASRs have now become the second largest method of share repurchase in the U.S., representing approximately 10% of all repurchases. We examine managements' motives to initiate an ASR to manage quarterly reported EPS and/or as a signaling mechanism. We find univariate support for the use of ASRs to meet quarterly analyst EPS forecasts. However, multivariate logit regressions reveal that firms are more likely to initiate an ASR if they would have met analysts' forecasts without the accretive effects of a repurchase. Contrary to the literature, we find both 5-day CARs and 1-year BHARs surrounding ASR announcements are significantly higher than those of non-ASR firms. However, post-announcement operating performance is declining for both ASR and non-ASR firms. Taken together, our results support the use of ASRs to send a stronger signal of management's commitment to avoid overinvestment.
The objective of this study is to investigate the short and long-run valuation effects of stock repurchase announcements in Germany for the period from 1998 to 2008. Our sample includes established firms (DAX/MDAX) as well as initial public offerings (NM IPOs) which we both analyze and compare on various dimensions. Most importantly, these two samples reveal significant differences with respect to return behavior as well as with respect to explanatory factors. We also test the common theories to explain these valuation effects and examine the factors that may rationalize these stock returns and the motives. In addition, we explain the magnitude of the stock price reactions with company specific and market wide factors. To a large extent, overall short-run valuation effects are best explained with undervaluation signaling for established firms as well as for IPOs. However, the abnormal returns for repurchase announcements are significantly higher for NM IPOs compared to DAX/MDAX firms. In addition, IPOs have a significantly inferior pre-and postannouncement performance compared to DAX/MDAX firms. Our findings of buy-and-hold abnormal returns of -4.53% for IPOs and of 25.45% for established firms for the 2 year period [-250; 250] around the announcement and of -4.53% for IPOs and of 22.05% for established firms for the 2 year period [2; 500] following the announcement are in line with the results of Ikenberry, . These results are also supported by calendartime portfolio analysis and Fama-French alpha estimates. We also analyzed IPOs separately and find that free cash flow problems and owners' participation ratio at the time of the IPO are a significant determinant of share repurchases. We argue that free cash flow problems, i.e. agency problems, rather than undervaluation signaling drives the decision of initial public offerings to engage in repurchases.
The many facets of privately negotiated stock repurchases☆
Journal of Financial Economics, 2005
We investigate the causes and consequences of 737 privately negotiated share repurchases in the years [1984][1985][1986][1987][1988][1989][1990][1991][1992][1993][1994][1995][1996][1997][1998][1999][2000][2001]. In contrast to the negative announcement returns and positive repurchase premiums reported by past research, we find positive announcement returns and premiums that are not significantly different from zero. Only when we investigate the 60 "greenmail" events separately, we find results similar to past research. However, for this sub-sample, we find long-horizon excess return that are comparable to the average 18% repurchase premium, challenging the widely accepted opinion that managers overpay in "greenmail" repurchases. Moreover, we also find that our understanding of the event improves when we split the non-greenmail repurchases according to the price paid. Repurchases at a premium can be modeled as signals, while other repurchases are mere wealth transfers between the corporation and the selling stockholders the extent of which is determined by the relative bargaining power of the seller and the repurchasing firm.