Does prior record matter in the wealth effect of open market share repurchase announcement
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Does Prior Record Matter in the Wealth Effect of Open-Market Share Repurchase Announcement? Shao-Chi Chang National Cheng Kung University, Taiwan Sheng-Syan Chen National Taiwan University, Taiwan Li-Yu Chen National Cheng Kung University, Taiwan Main Idea

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Does prior record matter in the wealth effect of open market share repurchase announcement l.jpg

Does Prior Record Matter in the Wealth Effect of Open-Market Share Repurchase Announcement?

Shao-Chi Chang

National Cheng Kung University, Taiwan

Sheng-Syan Chen

National Taiwan University, Taiwan

Li-Yu Chen

National Cheng Kung University, Taiwan


Main idea l.jpg
Main Idea Share Repurchase Announcement?

◆Not required to publicly disclose for

open-market share repurchasing firms

◆ The amount of actual share repurchase

◆ Actual share repurchase

◆ Wealth effect

◆ Stock performance

Prior experience

Announcing date


Motivation 1 2 l.jpg
Motivation (1/2) Share Repurchase Announcement?

  • Positive wealth effect of share buybacks (Vermaelen, 1981; Comment and Jarrel, 1991; Nohel and Tarhan, 1998; Stephens and Weisbach, 1998)

    • undervaluation

    • redistribution of excess cash flow

    • capital structure changes

    • takeover attempts deterrence

  • The amount of actual repurchases

    • achieving above goals

    • managerial motives of share repurchase


Motivation 2 2 l.jpg
Motivation (2/2) Share Repurchase Announcement?

  • No actual completion of the repurchase program

    • only 20% of their buyback programs following their announcements (Fortune, 1995)

    • no acquisitions of shares made by most of the announcing firms in the 3 years following the announcements of repurchase programs (Stephens and Weisbach, 1998)

  • The evidence of incomplete actual repurchases

    • difficult to achieve above goals


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Motives for failure of complete buyback Share Repurchase Announcement?

  • Boosting share price without the intention of actual completion (Wall Street Journal ,1995)

  • Increase in earnings-per-shares by reducing total shares outstanding (Bens, Nagar, Skinner and Wong, 2003)

    • improvement of stock performance

  • The amount of actual repurchases

    Sorting managers into those that signal truthfully and those that signal falsely


1st purpose l.jpg
1st Purpose Share Repurchase Announcement?

◆ Actual share repurchase

◆ Wealth effect

Prior experience

Announcing date


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Main Idea Share Repurchase Announcement?

◆ Actual share repurchase

◆ Wealth effect

◆ Stock performance

Prior experience

Announcing date


Motivation l.jpg
Motivation Share Repurchase Announcement?

  • Undervaluation as the most cited reason for share repurchases (Ofer and Thakeor, 1987; Comment and Jarrel, 1991; Stephens and Weisbach, 1998; Ikenberry, Lakonishok, and Vermaelen, 2000)

  • An average buy-and-hold yearly return of 26.2% following the announcement date (Chan, Ikenberry and Lee, 2004)

  • Not meeting market expectation

    • no improvement of stock price

      • managers’ intentionally sending incorrect signals

      • their optimistically biased toward the intrinsic equity value


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2nd Purpose Share Repurchase Announcement?

◆ Stock performance

◆ Wealth effect

Prior experience

Announcing date


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Data Share Repurchase Announcement?

  • The announcements from Securities Data Corporation (SDC) during 1986 to 2005

  • Criteria

    • at least two repurchase announcements during the sample period

    • return data available on the Center for Research in Security Prices (CRSP) database

    • financial information available from Compustat database

  • Sample Distribution- Table 1


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Table 1-Sample Distribution (1/2) Share Repurchase Announcement?


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Table 1-Sample Distribution (2/2) Share Repurchase Announcement?


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Sample Selection Share Repurchase Announcement?

Total initial sample 5,717

First announcement (-)1,741

Missing control variables (-) 815

Consecutive announcements <one year (-)1,403

Final sample 1,758


Methodology 1 2 l.jpg
Methodology (1/2) Share Repurchase Announcement?

  • Measuring Abnormal Stock Return

    • Standard event-study methods

    • Table 2

  • Measuring Reacquired Shares (Stephens and Weisbach, 1998)

    • Changes in outstanding common shares, dollars spent on requiring shares, and the value increase of treasury stocks

    • Scaling each measure of actual repurchase by the total number of shares outstanding at the time of announcement


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Methodology (2/2) Share Repurchase Announcement?

1. Monthly decreases in the firm’s shares outstanding from CRSP cumulated quarterly

2. Quarterly decreases in the firm’s shares outstanding from Compustat

3. Dollars spent on reacquiring securities / the minimum share price in a given quarter

4. Dollars spent on reacquiring securities / the average share price in a given quarter

5. Quarterly increases in the dollar value of the firm’s treasury stock / the minimum share price in a given quarter

6. Quarterly increases in the dollar value of the firm’s treasury stock / the average share price in a given quarter


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Empirical Results Share Repurchase Announcement? (1/5)

  • Abnormal Returns Classified by the Actual Share Repurchases

    • Table 3 - Panel A

  • Abnormal Returns Classified by Market- Adjusted Buy-and-Hold Return

    • Table 3-Panel B

      Learning from prior evidence of share repurchase

  • Cross-Sectional Regression Analyses of the Announcement Period Returns

    • Table 4


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Empirical Results Share Repurchase Announcement? (2/5)

  • Robustness of the results

    • scaling actual repurchase by the number of shares to be repurchased in announced program

    • different event windows of cumulated abnormal returns (CAR (0, 1) , CAR (-1, 2) & CAR (2, 2) )

    • different period of cumulative repurchases over the half year, one and half years and over the entire two years

    • different intervals in measuring the market-adjusted BHR or raw BHR (6-month & 9-month)

    • consecutive announcements made morethan one and half years


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Empirical Results Share Repurchase Announcement? (3/5)

  • The earnings forecast revision of financial analysts

    • valuable information of investors’ expectation on the prospects of future cash flow (Givoly and Lakonishok, 1979; Fried and Givoly, 1982)

    • improving our understanding of stock market reactions (Brous and Kini, 1993)

  • Cross –Sectional Regression of Analyst’s Adjusted Forecast Revisions

    • Table 5


Empirical results 4 5 l.jpg

The difference between the current and prior actual share repurchases

Current

High actual buy

Current

Low actual buy

Prior

High actual buy

+

Prior

Low actual buy

Long-horizon abnormal return of following share repurchases

announcement

Empirical Results (4/5)

  • Actual share buyback and long-run return

  • Conditions the market to expect large current actual share repurchases

  • Loss of reputation

  • Surprising expectation

A Group

B Group


Empirical results 5 5 l.jpg
Empirical Results repurchases (5/5)

  • Robustness Check

    • actual share repurchases obtained from Compustat databases

    • no other share repurchases announcing firms in the four years after the announcing date

    • long-run return from second year to fourth year

    • consecutive announcements made more than one and half years


Conclusions l.jpg
Conclusions repurchases

◆ Short-term and long-term earnings forecasts

◆ Short-term and long-term earnings forecasts

◆ Actual share repurchase

◆ Wealth effect

◆ Wealth effect

◆ Stock performance

◆ Long-run return

Prior experience

Announcing date

Simultaneously consider the current and prior actual share repurchases into their long-term returns

  • Investors will learn from past experience about share repurchase announcements


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Contributions repurchases

  • To explore the relationship between prior evidence of share repurchase and the wealth effect on the following share repurchase announcements

    • to test the above mentioned relationship






Variables definitions l.jpg
Variables’ Definitions quintiles

Undervaluation

Redistribution of excess cash flow

Capital structure changes

Takeover attempts deterrence



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Analyst’ Earnings Forecast Revisions Returns

  • Brous (1992) and Brous and Kini (1993)

    • analysts’ forecast revision on the current-year earnings per share

  • Yoon and Starks (1995)

    • analysts’ forecasts of long-term earnings growth




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Definition of Variables Long-term Earnings Growth



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