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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

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
Main Idea

◆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
Motivation (1/2)
  • 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
Motivation (2/2)
  • 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
motives for failure of complete buyback
Motives for failure of complete buyback
  • 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
1st Purpose

◆ Actual share repurchase

◆ Wealth effect

Prior experience

Announcing date

main idea7
Main Idea

◆ Actual share repurchase

◆ Wealth effect

◆ Stock performance

Prior experience

Announcing date

motivation
Motivation
  • 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
2nd purpose
2nd Purpose

◆ Stock performance

◆ Wealth effect

Prior experience

Announcing date

slide10
Data
  • 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
sample selection
Sample Selection

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
Methodology (1/2)
  • 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
methodology 2 2
Methodology (2/2)

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

empirical results 1 5
Empirical Results (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
empirical results 2 5
Empirical Results (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
empirical results 3 5
Empirical Results (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

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
Empirical Results (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
Conclusions

◆ 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
contributions
Contributions
  • 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
Variables’ Definitions

Undervaluation

Redistribution of excess cash flow

Capital structure changes

Takeover attempts deterrence

analyst earnings forecast revisions
Analyst’ Earnings Forecast Revisions
  • 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