Open-Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment

This paper provides a simple explanation of open‐market stock repurchases and the stock price behavior surrounding them. There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open‐market repurchase announcements reveal information about the managers' private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open‐market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open‐market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts.     

Open‐Market Stock Repurchases by Insurance Companies and Signaling

The 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.     

Stock price behavior surrounding stock repurchase announcements: Evidence from Japan

This paper examines stock price behavior surrounding announcements of stock repurchases made by Japanese firms from 1995 to 1998. Our analysis shows that, much as in the case of the U.S. markets, stock prices in Japan go up in response to stock repurchase announcements. We also find that there is no significant difference between the market reaction to the announcement for intention of repurchase execution and the market reaction to the announcement of an article alteration to allow stock repurchases. On the other hand, there is a significant difference in the pre-announcement period returns motivating these two announcements. While a large decline in stock price will motivate a firm to execute a stock repurchase, a smaller price decline will motivate a firm to merely alter its articles of association to allow future repurchases.     

The Effects of Stock Repurchases on Rival Firms

This paper investigates the stock price behavior of rival firms in the same industry as firms announcing stock repurchase tender offers. Using a sample of 134 repurchase announcements, I find that rival firms on average realize insignificant announcement period abnormal returns. Negative rival stock price performance is detected over longer intervals surrounding the announcement period and for a subset of announcements which ex ante were identified as most likely to affect rivals. This evidence, however, is statistically weak and does little to alter the overall conclusion that the information in repurchase announcements is primarily firm-specific.     

The Wealth and Information Effects of Insurers' Open Market Stock Repurchase Announcements

This article examines the use of an increasingly popular method of cash disbursement in the insurance industry: stock repurchase programs. Using a sample of stock repurchase announcements between 1981 and 1997, we examine the motivation for stock repurchase, estimate the market reaction to the repurchase announcement, and evaluate the magnitude of the reaction as it relates to particular insurance industry and firm characteristics. We examine the abnormal returns around the announcement day and find a significant positive wealth effect associated with repurchase announcements—a result that is consistent with that of other studies of both nonfinancial and financial firms. However, we suspect that the nature of the insurance product and the highly regulated status of the insurance industry might serve to mitigate the magnitude of an announcement effect. In fact, we find that the effect for all insurers is smaller than that obtained in samples of industrial firms. Finally, we examine the relationships between the magnitude of the announcement effect and various firm characteristics and test the significance of information signaling and Jensen's free cash flow theories in the insurance setting.     

Selective Publicity and Stock Prices

I examine how media coverage of good and bad corporate news affects stock prices, by studying the effect of investor relations (IR) firms. I find that IR firms “spin” their clients' news, generating more media coverage of positive press releases than negative press releases. This spin increases announcement returns. Around earnings announcements, however, IR firms cannot spin the news and their clients' returns are significantly lower. This pattern is consistent with positive media coverage increasing investor expectations, creating disappointment around hard information. Using reporter connections and geographical links, I argue that IR firms causally affect both media coverage and returns.     

Asymmetric Effects of Interest Rate Changes on Stock Prices

This study examines the stock price adjustment process around announcements of changes in the federal funds rate target in the 1990s using an asymmetric autoregressive exponential GARCH model (ASAR‐EGARCH). We find that target change announcements convey new information to the stock market. Risk aversion increases before the announcement of a rate change, and especially before the announcement of a joint target and discount rate change. The volatility estimates suggest that such joint rate changes send a clearer signal to the stock market about monetary policy objectives relative to unilateral target changes. Our findings are consistent with overreaction in the wake of bad news (rate hikes), and point to a shift in volatility from before to after the rate change announcement since the adoption of the immediate disclosure policy of the Federal Open Market Committee in February 1994.     

Stock Repurchase and Agency Problems: New Evidence in Taiwan's Stock Market

This paper explores stock repurchase and agency issues in an emerging market with special regulations. Using match samples, agency-related variables are investigated for pre- and postannouncement periods. Our empirical evidence demonstrates that stock repurchase is related to agency cost mitigation. Agency problems are also significantly related to the preannouncement undervaluation of stock repurchase, after controlling for the effects of growth opportunity and asymmetric information. Finally, a company with a higher ratio of expected repurchase or higher agency costs normally enjoys better market response upon announcement.     

Share repurchases as a potential tool to mislead investors

A rich literature argues that stock repurchases often serve as positive economic signals beneficial to investors. Yet due to their inherent flexibility, open-market repurchase programs have long been criticized as weak signals lacking commitment. We evaluate whether some managers potentially use buyback announcements to mislead investors. We focus on cases where managers were seemingly under heavy pressure to boost stock prices and might have announced a repurchase only to convey a false signal. For suspect cases, the immediate market reaction to a buyback announcement does not differ from that generally observed. However over longer horizons, suspect firms do not enjoy the improvement in economic performance otherwise observed. Suspect firms repurchase less stock. Further, managers in suspect firms have comparatively higher exposure to stock options, a potentially endogenous result suggesting greater sensitivity to both stock valuation and to future equity dilution. Overall, the results suggest only a limited number of managers may have used buybacks in a misleading way as “cheap talk.” Yet as theory also suggests, we find no long-run economic benefit to this behavior.     

OPEN MARKET STOCK REPURCHASE PROGRAMS AND LIQUIDITY

In this paper I examine the behavior of bid and ask spreads and depths around announcements of open market stock repurchase programs. For a sample of 195 announcements from 1988 to 1990, I find statistically significant evidence of a small decline in spreads and no evidence of a shift in depths following the announcement date. Results are similar for a subsample of firms experiencing post-announcement declines in the number of shares outstanding. I conclude that open market repurchase programs as used recently do not adversely affect market liquidity.     

The attenuation effect of social media: Evidence from acquisitions by large firms

We examine the role of social media in firm acquisitions. Twitter utilizes the “push” technology that allows firms to reduce information asymmetry by disseminating news to a broader set of investors in a timely manner. Using hand collected acquisition announcements from Twitter covering the period from 2009 to 2012, we find that the acquirer size is a main determinant of disclosing acquisition announcements on Twitter. Large acquirers announce their acquisitions on Twitter and, as a result, are able to attenuate the anticipated negative market reaction at acquisition announcement. We find no evidence that the attenuation effect of announcing acquisitions on Twitter subsequently reverses or that announcing acquisitions on Twitter is positively associated with pre-announcement earnings management. Overall, our results suggest that Twitter has become an important investor relation channel for major corporate events such as acquisition announcements and that large acquirers can use this new channel to enhance stability in their stock prices.     

OPEN MARKET REPURCHASES: THE VALUE FROM BUYING SHARES AT A DISCOUNT

This article shows that share repurchase announcements create value for shareholders when the shares of the industrial firm sell at a discount from the value of the underlying assets, even when shareholders and managers share full information about the firm's prospects and the firm's operating performance is not expected to improve. The value created by capturing the discount on the repurchased shares is a function of only two variables: the percentage discount prior to the announcement and the proportion of shares to be repurchased.
For a sample of 100 companies selling below net asset value, the authors report that the excess stock returns surrounding their announcements of open market repurchases are (significantly) positively associated with the authors' estimates of the value captured from buying shares at a discount. Moreover, the stock market's response to repurchase announcements by companies that are selling at a discount is considerably more positive than to announcements by firms selling at a premium.     

The impact of monetary policy decisions on stock returns: Evidence from Thailand

Although numerous studies have examined the effect of monetary policy on stock prices, empirical research in the international setting remains relatively scant. Therefore, this topic is reexamined in the context of Thailand. In a sample of 50 repurchase rate announcements of the Bank of Thailand during 2003–2009, our regression results suggest that the raw change in the repurchase rate has a negative effect on stock returns at the market level, which is inconsistent with the literature. Contrary to the results of numerous studies, we find that at the market level the expected change in the repurchase rate has a negative effect on stock returns and the unexpected change in the repurchase rate exhibits no effect on stock returns. However, the effect of the unexpected change in the repurchase rate on stock returns is evident at the firm level. Our findings also suggest that the stock market's response to the repurchase rate change is asymmetric. The unexpected change in the repurchase rate that is considered as good news has a negative effect on stock returns. Overall, the evidence lends support to the notion that the monetary policy announcements have a significant effect on stock prices and further adds to the debate on whether the creditability of the monetary authority may contribute to the stock market's response to the monetary policy actions.     

PROFITABILITY, EARNINGS ANNOUNCEMENT TIME LAGS, AND STOCK PRICES

This research addresses (1) whether firms with lower (hgher) than expected earnings fgures released those figures to the public later (earlier) than expected and (2) whether there is a reaction by the capital market to the timing of the earnings announcement. The results indicate that later than expected earnings announcements are likely to contain worse news than early announcements. Also the stock returns of late reporting firms appear to be lower than that of early reporting firms in the days surrounding the earnings announcement date.     

The Wealth Effects of Repurchases on Bondholders

Prior research has documented positive abnormal stock returns around the announcements of repurchase programs; several explanations of these returns have been suggested, including signaling, free cash flow, and wealth redistributions. This study analyzes abnormal stock, bond, and firm returns around repurchase announcements to examine these hypotheses. We find evidence consistent with both signaling and wealth redistribution. The loss to bondholders is a function of the size of the repurchase, and the risk of the firm's debt. We also find that bond ratings are twice as likely to be downgraded as upgraded after the announcement of the repurchase program.     

STOCK REPURCHASES AND SECURITYHOLDER RETURNS: A CASE STUDY OF TELEDYNE

This study examines securityholder returns around nine major repurchase announcements and 10 other repurchase-related announcements by the Teledyne Corporation between 1972 and 1984. Statistically significant positive excess returns to common stock and convertible preferred stockholders are documented. Contrary to prior research that investigated the average response to repurchase announcements, however, there is a wealth transfer from bondholders to stockholders. Bondholder returns around the repurchase announcements are significantly negative. These returns are examined for each announcement and each bond issue.     

Stock repurchasing and corporate social responsibility

Stock repurchases are controversial. Researchers often view the positive association between free cash flow and the volume of the stock repurchases to be in the shareholders’ interest and the positive association between executive options and stock repurchases to be in the managers’ interest. Using firms’ corporate social responsibility (CSR) ratings as a measure of ethical culture—one that increases the cost of self-serving behavior for managers— we examine whether a firm’s CSR rating is related to its stock repurchase decisions. Although the baseline regression shows a positive association between CSR and repurchases, we find that CSR amplifies the positive association between free cash flow and stock repurchases and lessens the positive association between executive options and stock repurchases. These results indicate that ethical culture might play a role in repurchase decisions: it may encourage repurchases aligned with shareholders’ interests and discourage those primarily in managers’ interest. Furthermore, we also find that high CSR firms are associated with a greater completion rate of announced repurchase programs and receive more favorable stock market reaction to their repurchase announcements.     

Stock Price Distributions and News: Evidence from Index Options

We estimate the shape of the distribution of stock prices using data from options on the underlying asset, and test whether this distribution is distorted in a systematic manner each time a particular news event occurs. In particular we look at the response of the FTSE100 index to market wide announcements of key macroeconomic indicators and policy variables. We show that the whole distribution of stock prices can be distorted on an event day. The shift in distributional shape happens whether the event is characterized as an announcement occurrence or as a measured surprise. We find that larger surprises have proportionately greater impact, and that higher moments are more sensitive to events however characterised.     

投资者意见分歧视角下盈余公告的市场反应经验研究

本文从投资者意见分歧角度出发,研究盈余发布前后一段时间内中国股票价格行为特征,并在此基础上首次考虑公告所引发的二次意见分歧对市场反应产生的影响。研究结果表明意见分歧越高的公司,股价在公告前高估情况越严重、在公告时的下降幅度越大,二次意见分歧高的股票其超额收益较大。此外,本文还发现中国股市普遍存在盈余公告提前泄露,股价的收益特征较国外有所前移,通过进一步分析发现市场知道坏消息的时间要早于好消息。     

Earnings Announcement Lags and Market Responses—Does the Tone of the News and the Market Sentiment Matter?

We investigate earnings announcement lags (period from the end of the reporting period until the announcement date) for the good and the bad quarterly earnings news across different market sentiment periods as well as market reactions thereto. Companies listed on Baltic stock exchanges exhibit clear signs of strategic timing of earnings announcements. Earnings announcement lags for the bad news tend to be longer than those for the good news. This difference is more pronounced during low market sentiment periods. If the release of the bad news is postponed, abnormal return responses remain lower, as expected.