Share Repurchases, the Clustering Problem, and the Free Cash Flow Hypothesis |
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| Authors: | Chuan-San Wang,Norman Strong&dagger ,Samuel Tung&Dagger , Steve Lin¶ |
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| Affiliation: | Chuan-San Wang is an Assistant Professor of Accounting at the National Taiwan University in Taipei, Taiwan.;Norman Strong is a Professor of Finance at the University of Manchester in Manchester, UK.;Samuel Tung is a Professor of Accounting at National Taiwan University in Taipei, Taiwan.;Steve Lin is an Associate Professor of Accounting at the Florida International University in Miami, FL. |
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| Abstract: | We examine the market reaction to announcements of actual share repurchases, events that cluster both within and across firms. Using a multivariate regression model, we find that the market reacts positively to the events, indicating that these announcements provide additional information to that contained in the initial repurchase intention announcements. Further, the market response is especially favorable for firms with overinvestment problems as measured by Tobin's q , and is not related to signaling costs as measured by the size of the repurchase. Our findings generally support the hypothesis that share repurchases reduce the agency costs of excessive free cash flow . |
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