Market Underreaction to Open Market Share Repurchases

We examine long-run firm performance following open market share repurchase announcements which occurred during the period 1980 to 1990. We find that the average abnormal four-year buy-and-hold return measured after the initial announcement is 12.1 percent. For `value' stocks, companies more likely to be repurchasing shares because of undervaluation, the average abnormal return is 45.3 percent. For repurchases announced by `glamour' stocks where undervaluation is less likely to be an important motive, no positive drift in abnormal returns is observed. Thus, at least with respect to value stocks, the market errs in its initial response and appears to ignore much of the information conveyed through repurchase announcements.

[1]  Theo Vermaelen,et al.  Common stock repurchases and market signalling: An empirical study☆ , 1981 .

[2]  Josef Lakonishok,et al.  Anomalous Price Behavior Around Repurchase Tender Offers , 1990 .

[3]  G. Mandelker,et al.  The Post-Merger Performance of Acquiring Firms: A Re-examination of an Anomaly , 1992 .

[4]  Jay R. Ritter,et al.  Measuring abnormal performance: Do stocks overreact? , 1992 .

[5]  P. Asquith,et al.  Signalling with Dividends, Stock Repurchases, and Equity Issues , 1986 .

[6]  J. Ritter The Long-Run Performance of Initial Public Offerings , 1991 .

[7]  E. Fama,et al.  The Cross‐Section of Expected Stock Returns , 1992 .

[8]  A. Thakor,et al.  A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchase and Dividends , 1987 .

[9]  B. LeBaron,et al.  Simple Technical Trading Rules and the Stochastic Properties of Stock Returns , 1992 .

[10]  H. Baker,et al.  MANAGEMENT'S VIEW OF STOCK REPURCHASE PROGRAMS , 1981 .

[11]  H. Nejat Seyhun,et al.  Overreaction or Fundamentals: Some Lessons from Insiders' Response to the Market Crash of 1987 , 1990 .

[12]  Tim Loughran,et al.  The New Issues Puzzle , 1995 .

[13]  Jerold B. Warner,et al.  Using daily stock returns: The case of event studies , 1985 .

[14]  Stephen A. Ross,et al.  A Test of the Efficiency of a Given Portfolio , 1989 .

[15]  Andrei Shleifer,et al.  Equilibrium Short Horizons of Investors and Firms , 1990 .

[16]  Larry Y. Dann Common stock repurchases : An analysis of returns to bondholders and stockholders , 1981 .

[17]  Bruce D. Grundy,et al.  Optimal Investment with Stock Repurchase and Financing as Signals , 1989 .

[18]  G. Jarrell,et al.  The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases , 1991 .

[19]  Jerold B. Warner,et al.  MEASURING SECURITY PRICE PERFORMANCE , 1980 .

[20]  Josef Lakonishok,et al.  Contrarian Investment, Extrapolation, and Risk , 1993 .

[21]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[22]  J. A. Miles,et al.  Restructuring through spinoffs: The stock market evidence , 1993 .

[23]  W. R. Lane,et al.  Managements' View on Share Repurchase and Tender Offer Premiums , 1989 .

[24]  Josef Lakonishok,et al.  Corporate Governance through the Proxy Contest: Evidence and Implications , 1993 .