New Issue of FREE Empirical Finance Research Newsletter (plus Stock Screen Results)
Our partners Wesley R. Gray of the University of Chicago and Andrew E. Kern of the University of Missouri present:
May 2009 (current issue) — Empirical Finance Research Newsletter on Repurchases, Reputation and Returns, a paper by Alice A. Bonaime
Abstract: Though open market repurchase announcements are generally viewed as positive signals and are associated with positive abnormal returns, they are not binding commitments. This paper examines whether the market incorporates a firm's reputation when evaluating the credibility of an announcement to buy back stock. I find evidence that ex ante indicators of managerial credibility are reflected in announcement returns. Empirical results support the theory that announcements made by firms with high prior completion rates are viewed as more credible, but that announcement returns are unrelated to accruals, meeting analysts' expectations, or insider trading during the prior repurchase program. Additionally, high prior repurchase plan completion rates are associated with greater abnormal long-run returns. For the subset of firms in the lowest quintile of returns following the prior announcement, I identify two-year cumulative abnormal buy-and-hold returns of 27.1 percent on average for firms whose prior completion rates were high.
Conclusions: This paper expands on the already well-known strategy of tracking share buybacks. Although for practical reasons it may be difficult to implement the strategy as it is presented in the paper, any trading strategy that already uses share buybacks as a signaling factor stands to benefit from an augmentation that accounts for past buyback completion rate.