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  1. 1. 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
  2. 2. 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
  3. 3. Motivation (1/2) <ul><li>Positive wealth effect of share buybacks (Vermaelen, 1981; Comment and Jarrel, 1991; Nohel and Tarhan, 1998; Stephens and Weisbach, 1998) </li></ul><ul><ul><li>undervaluation </li></ul></ul><ul><ul><li>redistribution of excess cash flow </li></ul></ul><ul><ul><li>capital structure changes </li></ul></ul><ul><ul><li>takeover attempts deterrence </li></ul></ul><ul><li>The amount of actual repurchases </li></ul><ul><ul><li>achieving above goals </li></ul></ul><ul><ul><li>managerial motives of share repurchase </li></ul></ul>
  4. 4. Motivation (2/2) <ul><li>No actual completion of the repurchase program </li></ul><ul><ul><li>only 20% of their buyback programs following their announcements (Fortune, 1995) </li></ul></ul><ul><ul><li>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) </li></ul></ul><ul><li>The evidence of incomplete actual repurchases </li></ul><ul><ul><li>difficult to achieve above goals </li></ul></ul>
  5. 5. Motives for failure of complete buyback <ul><li>Boosting share price without the intention of actual completion ( Wall Street Journal ,1995) </li></ul><ul><li>Increase in earnings-per-shares by reducing total shares outstanding (Bens, Nagar, Skinner and Wong, 2003) </li></ul><ul><ul><li>improvement of stock performance </li></ul></ul><ul><li>The amount of actual repurchases </li></ul><ul><li> Sorting managers into those that signal truthfully and those that signal falsely </li></ul>
  6. 6. 1st Purpose Announcing date Prior experience ◆ Actual share repurchase ◆ Wealth effect
  7. 7. Main Idea Announcing date Prior experience ◆ Actual share repurchase ◆ Wealth effect ◆ Stock performance
  8. 8. Motivation <ul><li>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) </li></ul><ul><li>An average buy-and-hold yearly return of 26.2% following the announcement date (Chan, Ikenberry and Lee, 2004) </li></ul><ul><li>Not meeting market expectation </li></ul><ul><ul><li>no improvement of stock price </li></ul></ul><ul><ul><ul><li>managers’ intentionally sending incorrect signals </li></ul></ul></ul><ul><ul><ul><li>their optimistically biased toward the intrinsic equity value </li></ul></ul></ul>
  9. 9. 2nd Purpose Announcing date Prior experience ◆ Wealth effect ◆ Stock performance
  10. 10. Data <ul><li>The announcements from Securities Data Corporation (SDC) during 1986 to 2005 </li></ul><ul><li>Criteria </li></ul><ul><ul><li>at least two repurchase announcements during the sample period </li></ul></ul><ul><ul><li>return data available on the Center for Research in Security Prices (CRSP) database </li></ul></ul><ul><ul><li>financial information available from Compustat database </li></ul></ul><ul><li>Sample Distribution- Table 1 </li></ul>
  11. 11. Table 1-Sample Distribution (1/2)
  12. 12. Table 1-Sample Distribution (2/2)
  13. 13. 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
  14. 14. Methodology (1/2) <ul><li>Measuring Abnormal Stock Return </li></ul><ul><ul><li>Standard event-study methods </li></ul></ul><ul><ul><li>Table 2 </li></ul></ul><ul><li>Measuring Reacquired Shares (Stephens and Weisbach, 1998) </li></ul><ul><ul><li>Changes in outstanding common shares, dollars spent on requiring shares, and the value increase of treasury stocks </li></ul></ul><ul><ul><li>Scaling each measure of actual repurchase by the total number of shares outstanding at the time of announcement </li></ul></ul>
  15. 15. Methodology (2/2) <ul><li>1. Monthly decreases in the firm’s shares outstanding from CRSP cumulated quarterly </li></ul><ul><li>2. Quarterly decreases in the firm’s shares outstanding from Compustat </li></ul><ul><li>3. Dollars spent on reacquiring securities / the minimum share price in a given quarter </li></ul><ul><li>4. Dollars spent on reacquiring securities / the average share price in a given quarter </li></ul><ul><li>5. Quarterly increases in the dollar value of the firm’s treasury stock / the minimum share price in a given quarter </li></ul><ul><li>6. Quarterly increases in the dollar value of the firm’s treasury stock / the average share price in a given quarter </li></ul>
  16. 16. Empirical Results (1/5) <ul><li>Abnormal Returns Classified by the Actual Share Repurchases </li></ul><ul><ul><li>Table 3 - Panel A </li></ul></ul><ul><li>Abnormal Returns Classified by Market- Adjusted Buy-and-Hold Return </li></ul><ul><ul><li>Table 3-Panel B </li></ul></ul><ul><li> Learning from prior evidence of share repurchase </li></ul><ul><li>Cross-Sectional Regression Analyses of the Announcement Period Returns </li></ul><ul><ul><li>Table 4 </li></ul></ul>
  17. 17. Empirical Results (2/5) <ul><li>Robustness of the results </li></ul><ul><ul><li>scaling actual repurchase by the number of shares to be repurchased in announced program </li></ul></ul><ul><ul><li>different event windows of cumulated abnormal returns (CAR (0, 1) , CAR (-1, 2) & CAR (2, 2) ) </li></ul></ul><ul><ul><li>different period of cumulative repurchases over the half year, one and half years and over the entire two years </li></ul></ul><ul><ul><li>different intervals in measuring the market-adjusted BHR or raw BHR (6-month & 9-month) </li></ul></ul><ul><ul><li>consecutive announcements made more than one and half years </li></ul></ul>
  18. 18. Empirical Results (3/5) <ul><li>The earnings forecast revision of financial analysts </li></ul><ul><ul><li>valuable information of investors’ expectation on the prospects of future cash flow (Givoly and Lakonishok, 1979; Fried and Givoly, 1982) </li></ul></ul><ul><ul><li>improving our understanding of stock market reactions (Brous and Kini, 1993) </li></ul></ul><ul><li>Cross –Sectional Regression of Analyst’s Adjusted Forecast Revisions </li></ul><ul><ul><li>Table 5 </li></ul></ul>
  19. 19. Empirical Results (4/5) <ul><li>Actual share buyback and long-run return </li></ul><ul><li>Conditions the market to expect large current actual share repurchases </li></ul><ul><li>Loss of reputation </li></ul><ul><li>Surprising expectation </li></ul>B Group A Group Prior Low actual buy Prior High actual buy Current Low actual buy Current High actual buy The difference between the current and prior actual share repurchases Long-horizon abnormal return of following share repurchases announcement +
  20. 20. Empirical Results (5/5) <ul><li>Robustness Check </li></ul><ul><ul><li>actual share repurchases obtained from Compustat databases </li></ul></ul><ul><ul><li>no other share repurchases announcing firms in the four years after the announcing date </li></ul></ul><ul><ul><li>long-run return from second year to fourth year </li></ul></ul><ul><ul><li>consecutive announcements made more than one and half years </li></ul></ul>
  21. 21. Conclusions Announcing date Prior experience ◆ Actual share repurchase ◆ Wealth effect ◆ Stock performance ◆ Short-term and long-term earnings forecasts <ul><li>Investors will learn from past experience about share repurchase announcements </li></ul>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
  22. 22. Contributions <ul><li>To explore the relationship between prior evidence of share repurchase and the wealth effect on the following share repurchase announcements </li></ul><ul><ul><li>to test the above mentioned relationship </li></ul></ul>
  23. 23. Thank you for your Attentions!
  24. 24. Table 2-Abnormal Returns
  25. 25. Table 3-Abnormal Returns Classified by the Actual Share Repurchases
  26. 26. Table 3-Abnormal Returns Classified by Market-adjusted BHR quintiles
  27. 27. Variables’ Definitions Takeover attempts deterrence Undervaluation Redistribution of excess cash flow Capital structure changes =1 if a firm is the object of a takeover or a rumor of a takeover =0 otherwise TAKEOVER Logged book-to-market ratio LBM Natural logarithm of market value of equity LSIZE Percentage of announced repurchases shares relative to total outstanding shares Shares announced/out. Industry median -adjusted ratio of the total debt to total assets LEV Industry median-adjusted free cash flows /assets FCF Prior 6-month buy-and-hold returns compounded before the announcement date minus the compounded return of market index over the same period Prior 6-month AR A firm announces during the sample period Sequence Sample’s one-year BHR minus value-weighted market index’s one-year BHR following the last repurchase plan announcement Market-adjusted BHR Increase in the dollar value of treasury stock divided by mean price TS/mean price Increase in the dollar value of treasury stock divided by low price TS/low price Repurchase dollars divided by the mean price PC/mean price Repurchase dollars divided by the low price PC/low price Compustat Compustat-share CRSP Crsp-share Actual share repurchases Definitions Variables
  28. 28. Table 4- Regression Analyses of the Announcement Period Returns
  29. 29. Analyst’ Earnings Forecast Revisions <ul><li>Brous (1992) and Brous and Kini (1993) </li></ul><ul><ul><li>analysts’ forecast revision on the current-year earnings per share </li></ul></ul><ul><li>Yoon and Starks (1995) </li></ul><ul><ul><li>analysts’ forecasts of long-term earnings growth </li></ul></ul>
  30. 30. Table 5- Analyst’s Adjusted Forecast Revisions of Current-year Earnings Per Share
  31. 31. Table 6- Analyst’s Adjusted Forecast Revisions of Long-term Earnings Growth
  32. 32. Definition of Variables Difference between current actual share and pervious actual share Change actual share Sample’s 3-year BHR minus market index’s 3-year BHR AR4 Sample’s 3-year BHR minus industry-size-and-BM matching firm’s 3-year BHR AR3 Sample’s 3-year BHR minus industry-and-size matching firm’s 3-year BHR AR2 Sample’s 3-year BHR minus size matching firm’s 3-year BHR AR1 Definition Variables
  33. 33. Table7-Cross-Sectional Regression Analyses of the Long-run Stock Returns of Shares Repurchases

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