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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 Announcing date Prior experience ◆ Actual share repurchase ◆ Wealth effect ◆ Stock performance ◆ Not required to publicly disclose for open-market share repurchasing firms ◆ The amount of actual share repurchase

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 Announcing date Prior experience ◆ Actual share repurchase ◆ Wealth effect

Main Idea: 

Main Idea Announcing date Prior experience ◆ Actual share repurchase ◆ Wealth effect ◆ Stock performance

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 Announcing date Prior experience ◆ Wealth effect ◆ Stock performance

Data: 

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

Table 1-Sample Distribution (1/2): 

Table 1-Sample Distribution (1/2)

Table 1-Sample Distribution (2/2): 

Table 1-Sample Distribution (2/2)

Sample Selection: 

Sample Selection Total initial sample 5,717 First announcement (-)1,741 Consecutive announcements <one year (-)1,403 Final sample 1,758 Missing control variables (-) 815

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 more than 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): 

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 B Group A 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 Announcing date Prior experience ◆ Actual share repurchase ◆ Wealth effect ◆ Stock performance ◆ Short-term and long-term earnings forecasts Investors will learn from past experience about share repurchase announcements Simultaneously consider the current and prior actual share repurchases into their long-term returns ◆ Long-run return ◆ Wealth effect ◆ Short-term and long-term earnings forecasts

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

Thank you for your Attentions!: 

Thank you for your Attentions!

Table 2-Abnormal Returns : 

Table 2-Abnormal Returns

Table 3-Abnormal Returns Classified by the Actual Share Repurchases: 

Table 3-Abnormal Returns Classified by the Actual Share Repurchases

Table 3-Abnormal Returns Classified by Market-adjusted BHR quintiles : 

Table 3-Abnormal Returns Classified by Market-adjusted BHR quintiles

Variables’ Definitions: 

Variables’ Definitions Takeover attempts deterrence Undervaluation Redistribution of excess cash flow Capital structure changes

Table 4- Regression Analyses of the Announcement Period Returns : 

Table 4- Regression Analyses of the Announcement Period Returns

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

Table 5- Analyst’s Adjusted Forecast Revisions of Current-year Earnings Per Share: 

Table 5- Analyst’s Adjusted Forecast Revisions of Current-year Earnings Per Share

Table 6- Analyst’s Adjusted Forecast Revisions of Long-term Earnings Growth: 

Table 6- Analyst’s Adjusted Forecast Revisions of Long-term Earnings Growth

Definition of Variables: 

Definition of Variables

Table7-Cross-Sectional Regression Analyses of the Long-run Stock Returns of Shares Repurchases : 

Table7-Cross-Sectional Regression Analyses of the Long-run Stock Returns of Shares Repurchases