1 / 18

Do managers time the market ? Evidence from open-market share repurchases

Do managers time the market ? Evidence from open-market share repurchases. Konan Chan, Univ. of Hong Kong and National Taiwan Univ. David Ikenberry, University of Illinois at Urbana-Champaign Inmoo Lee, National University of Singapore.

analu
Download Presentation

Do managers time the market ? Evidence from open-market share repurchases

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Do managers time the market ?Evidence from open-market share repurchases Konan Chan, Univ. of Hong Kong and National Taiwan Univ. David Ikenberry, University of Illinois at Urbana-Champaign Inmoo Lee, National University of Singapore 2006 NTU International Conference on Finance , December 2006

  2. Motivation • Managers seem to have timing ability in making corproate decisions • IPOs: Ritter (1991) • SEOs: Loughran and Ritter (1995) • (Stock) Mergers: Loughran and Vijh (1997) • Repurchases: Ikenberry, Lakonishok, Vermaelen (1995) • Spin-offs: Cusatis, Miles and Woolridge (1993) • Splits: Ikenberry and Ramanth (2002) • Equity share in new issues: Baker and Wurgler (2002) Chan, Ikenberry, Lee

  3. Motivation (continued) • Two major concerns • Biased methodology • Bad model problem: Fama (1998), Eckbo et al (2000) • Wrong method: Brav et al (2000), Mitchell and Stafford (2000) • Time dependence: Gompers and Lerner (2003) • Statistical test: Brav (2000) • Pseudo market timing: Schultz (2003) • Managers do not have timing ability and they make corporate decisions solely based on past market performance • This will mechanically create the pseudo performance following managerial decisions Chan, Ikenberry, Lee

  4. Pseudo market timing (Schultz (2003)) • Assume no abnormal return in each period • Issue when prices are high • Abnormal return occurs only when in event-time, but not in calendar-time • Poor-performed firms get more weight in event-time Chan, Ikenberry, Lee

  5. Pseudo market timing • Key implications of PMT • Strong relationship between corporate events and past market performance • The abnormal returns, if there is any, exist only when the event-time approach is used • Debate • Support (Butler et al (2005)): return predictability of equity share in new issues is due to PMT • Against (Baker et al (2006)): PMT explains only a small portion of equity offering decisions Chan, Ikenberry, Lee

  6. Goal of this paper • Examine whether pseudo market timing can explain the share repurchases decision • Check if key implications of pseudo market timing hold • How much abnormal return can be explained by pseudo market timing? • Examine if the performance is affected actual buyback, an indicator of managerial perception of undervaluation Chan, Ikenberry, Lee

  7. Why repurchases? • Out-of-sample test: past studies of pseudo market timing focus on IPOs • Examine the major motive to buy back: mispricing Chan, Ikenberry, Lee

  8. Data • Open-market repurchases (Chan et al (2004)) • 1980-1996: 5,508 obs • Sample selection • Size • BM • Share price >= $3 prior to announcements • Actual repurchase • Quarterly cash flow statement Chan, Ikenberry, Lee

  9. Buy-and-hold abnormal returns • Matching firms: control size, BM, stock exchange • Poor performance prior to announcements • Strong outperformance following buyback programs Chan, Ikenberry, Lee

  10. Relationship between number of repurchases and past market performance • Except the months in the highest past return quintile, there is no strong relationship between the number of repurchases and past market performance • One would expect to observe many obs when past return is low Chan, Ikenberry, Lee

  11. Calendar-time abnormal return • Carhart (1997) four-factor model regressions • Portfolios include firms announcing buybacks in past 4 years • OLS assigns equal weight to each calendar month • WLS uses # of obs as weight, and converts back to event-time Chan, Ikenberry, Lee

  12. BHARs condition on actual buybacks • Actual repurchase • Non-buy: no buyback at all • Buy-less: buy back <= 4% of shares outstanding • Buy-more: buy back > 4% of shares outstanding Chan, Ikenberry, Lee

  13. BHARs condition on actual buybacks Chan, Ikenberry, Lee

  14. CAR using RATS based on Carhart model Chan, Ikenberry, Lee

  15. Conclusion • Evaluate the key implications of PMT • Open-market repurchase decisions do not strongly depend on past market performance • Strong abnormal returns are still observed when the calendar-time approach is used • Evaluate the performance condition on actual buyback activity • There is a strong relationship between actual buyback and future performance • The relationship is particularly strong in value firms Chan, Ikenberry, Lee

  16. Conclusion (continued) • Pseudo market timing can explain only a small portion of return drifts following repurchases • The share repurchase decisions do not seem to be explained by pseudo market timing, but indicate the managerial timing ability Chan, Ikenberry, Lee

More Related