Share Price Performance Following Actual Share Repurchases**

Current version: Nov. 25, 2002 JEL classification: G32, G35

Hua Zhang Department of Finance The Chinese University of Hong Kong Shatin, N.T., Hong Kong (852) 2609-7760 (tel.) (852) 2603-6586 (fax)
hzhang@cuhk.edu.hk

**

The author would like to thank Hugh Thomas, Yangru Wu and seminar participants at Peking University for their helpful comments. He also acknowledges the financial support from the Research Grants Council of Hong Kong (CUHK4204/00H). Kenneth Ng and Tat-ming Yiu provided excellent research assistance.

Share Price Performance Following Actual Share Repurchases

Abstract

Using actual share repurchase data from Hong Kong, this paper investigates

share price performance following actual share repurchases. On average, repurchasing firms do not exhibit superior abnormal performance either initially or over long horizons when they make actual share repurchases. However, the price performance of repurchasing firms varies across firm size and market-book value ratios, and shows a clear and consistent pattern. The market responds the most favorably to repurchases that are made by small and value (high book-tomarket value) firms. Over a long horizon, there is strong evidence that managers of value firms can deliver superior performance to long-term shareholders. The three-year buy-and-hold abnormal return, which is measured against a portfolio of control firms that are matched by size and book-to-market value ratios, is over 20%. At least, repurchases made by high book-tomarket value firms, for which undervaluation is more likely to occur, can benefit long-term shareholders.

Share Price Performance Following Actual Share Repurchases

I.

Introduction Open market share repurchases are one of the common ways for corporations to

distribute cash flows to their shareholders. The popularity of open market share repurchases in the U.S. market has been documented by Ikenberry, Lakonishok and Vermaelen (1995: hereafter, ILV), Stephens and Weisbach (1998), and Vermaelen (1981), among others. These programs represent 90% of all announced repurchase programs in the U.S. Many studies have investigated the market reaction to open-market share repurchase announcements (see, e.g., Comment and Jarrel (1991), Dann (1981), ILV (1995), and Vermaelen (1981)). The market reaction to the announcements of these programs is on average about 3.5% in the U.S.1 However, the announced share repurchase programs are not firm commitments, and are often not fully implemented. In some cases, only small percentages of the announced shares are acquired2. Ikenberry and Vermaelen (1996) argue that these programs effectively represent exchange options that provide the firm with the flexibility to exchange its market value for its true value at the managements discretion. Even if the management has no superior

information or the market price of the stock is fair at the time of the repurchase announcement, the stock price should increase to recognize the option value that is created by the open market repurchase program per se. Naturally, the exchange option value depends on

See, e.g., ILV (1995).

According to an estimation by Stephens and Weisbach (1998), firms on average acquire 74 to 82% of the announced target amount of shares, but 10% of the firms repurchase 5 percent or less within three years of the announcement.

the ability of the management to detect and seize the opportunities when share prices are relatively undervalued. To quote Ikenberry and Vermaelen (1996. p.22), the option to repurchase shares is only valuable to the extent that managers can detect valuation errors. If managers lack the ability to correctly detect deviations between market prices and true value, then the options will again be of little value. It is not clear whether insider managers have better judgment than other investors about the value of their shares as good investments relative to market benchmarks. It might be reasonable to argue that insider managers possess more company-specific information than outside investors do. However, one may well argue that outside professional investors such as fund managers and brokerage houses have more market-wide information or a greater capability to process it. An unanswered question is whether managers have the ability to detect and seize opportunities in making actual repurchases when their shares are undervalued. This question is critical to the Ikenberry and Vermaelen (1996) exchange option hypothesis. Ikenberry and Vermaelen pointed out that the option to repurchase shares is only valuable to the extent that managers can detect valuation errors. Unfortunately, a direct test of this interesting hypothesis is difficult in the U.S. context because actual share repurchases data can neither be observed at the time of transaction nor directly measured afterwards (Stephens and Weisbach (1998)). Taking the advantage of complete and timely disclosure required by the Stock Exchange of Hong Kong, this paper investigates stock price performance after actual share repurchases. The unique data allow us to quantify the market reaction to actual share repurchases. Therefore, we can directly investigate whether managers have the ability to assess if their stocks

are good investment when they make actual repurchases. It is found that, on average, insider managers do not seem to have such ability. However, the abnormal returns vary across size and market-to-book value quartiles, and show a clear and consistent pattern. For small and value (high book-to-market value) firms, the abnormal returns are both economically and statistically significant. Over a long horizon, there is strong evidence that managers of value firms can deliver superior performance. The three-year buy-and-hold abnormal return

(BHAR), which is measured against a portfolio of control firms that are matched by size and book-to-market value (BTMV) ratios, is over 20% A number of papers are related to this study. Brockman and Chung (2001), using intra-day data, investigate the timing ability of open market repurchases and the resultant impact on firm liquidity. They find that managers exhibit substantial timing ability and buyback activities impose a cost to the firm in the form of lower liquidity. Cook Krigman and Leach (1999),

using a sample of 64 US firms, investigated the market timing ability and price support motive of repurchase firms. They found mixed results for New York Stock Exchange traded and NASDAQ traded firms. In general, they find no evidence of market timing ability but some firms execute repurchases in a pattern consistent with the price support motive. This paper to some extent is similar to ILV (2000) where they examine the share price performance after actual repurchases in Canada. However, there is one fundamental difference. ILV(2000) can only track repurchase activity monthly whereas this study can trace repurchase activity to actual repurchasing day, thanks to the stringent disclosure requirement in Hong Kong. The remainder of the paper is organized as follows. Section II describes the regulatory and disclosure requirements and the share repurchase data in this study. Section III presents short-term stock

price performances surrounding actual share repurchase events. Section IV reports long-term stock price performances after actual share repurchases, and Section V concludes the paper.

II.

Disclosure Requirements and Share Repurchase Data In Hong Kong, listed firms must gain approval from both their shareholders annual

general meeting and the exchange to repurchase shares. The authorization is valid until the next shareholders general meeting. Firms cannot repurchase more than 10% of the outstanding shares at the passage of the resolution. Listed firms can buy back shares from the open

market at any time except for some sensitive period such as the one-month period before the earnings announcement. However, in any given month, they cannot repurchase more than 25% of the trading volume in previous month. They usually do not make public announcements prior to actual repurchases, as they are not required to do so, although they are required to disclose both the number of shares that were purchased and the price range at which the shares were repurchased. Pursuant to Rule 10.06 (4)(a) of the Stock Exchange of Hong Kong (SEHK) Listing Rules, a listed company is obliged to report to SEHK not later than 9:30 a.m. on the business day after any day on which it makes a purchase of shares3. The exchange will immediately release the submitted information to the media through its Teletext system. This means that the previous days share repurchase activities are fully disclosed to the public before the opening of the stock trading at 10:00 a.m. Usually one working day afterwards, the
3

For details of the SEHK Listing Rules, see Rules Governing the Listing of Securities, 3rd ed., Barham, Hallsworth and Jackson (1998).

Securities (Disclosure of Interest) Daily Summary -- Share Repurchase Report (SRR) is published. At the same time, the repurchase information appears in major local newspapers. In Hong Kong, almost all share repurchase programs are conducted via the SEHK. This study focuses on the open market share repurchase of the ordinary shares that are traded in the exchange. Other types of securities such as warrants, preference shares, and convertible bonds are excluded. Repurchases that are transacted via general offer and private arrangement4 are also excluded. Daily open market share repurchase activities from September 1993 through August 1997 were collected from the Securities (Disclosure of Interests) Daily Summary -Share Repurchase Report (SRR).5 Other information, such as stock prices, firm size or market capitalization (MV), book-to-market value (BTMV) ratios, and All-Ordinaries Index (AOI) series were obtained from Datastream. AOI is a value-weighted index made up of all stocks traded in Hong Kong. Table 1 reports the share repurchase activities in Hong Kong from September 1993 to August 1997. The sample is free from selection biases associated with survey method because it contains all open-market share repurchases in the sample period. During the sample period, 150 companies paid about HK$5.9 billion and bought back over 1.6 billion shares. The 150 sample firms made 3850 daily repurchases. Different firms exhibited very different forms of repurchase behavior. Some of them made very few repurchases during the sample period. For example, 6 firms repurchased only on a single day during the entire sample period. Others
4

There were only 5 such cases in the sample period.

The SEHK began to publish the SSR in 1993. Open market repurchases after the Asian financial crisis are not included because stock return data are not available to examine the long-run performance, and there is a need to avoid event clustering.

made frequent repurchases.

Chinese Estates Holdings Ltd (stock code 0127) repurchased

shares on 175 days during the four-year period. The purpose of this paper is to investigate share price performance surrounding and after actual repurchases. Obviously, if we consider every repurchase day as an event day, then we run into the risk that firms such as Chinese Estates Holdings, which made frequent repurchases, will have undue weighting in our sample portfolio returns. However, if we simply take the first repurchase of each firm as the event day, then much useful repurchase information will be disregarded. Therefore, only the first repurchase day is defined as an event when a firm makes multiple repurchases within a month. Under this definition, there are total 841 repurchase events, and Table 2 reports the summary statistics of actual share repurchase events. Size (market value) and BTMV quartile rankings are determined relative to all firms that were listed on SEHK on the event day. The most repurchase events are associated with medium-size firms. In contrast, glamour firms (the lowest BTMV quartile) have fewer repurchase events. Next, both short-term returns surrounding the actual share repurchase events and the long-term performance after the events are investigated. The results will help us to understand whether insider managers have the ability to determine whether their own stocks are good investments.

III.

Short-Term Share Price Performance A window of 41 trading days from 20 days before to 20 days after the event day

0, or (-20, +20), is used to measure short-term price performance surrounding the actual

repurchase events. This period is approximately equivalent to one calendar month before to one calendar month after the event day. Specifically, we examine cumulative abnormal returns (CARs) over three windows, CAR(-20, -1), CAR(0, +2), and CAR(+1, +20). As the investing public will be able to learn about an actual share repurchase on Day +1 through the teletext and read the disclosed repurchase information from either the SRR or newspapers on day +2, CAR(0, +2) is designed to capture the market initial reaction to actual share repurchases. CAR(+1, +20) is designed to investigate whether public investors can make any abnormal profits if they act immediately after they learn the disclosed actual share repurchase information. It is widely accepted that short-term abnormal returns are not very sensitive to the benchmark used6. returns7. This study uses the market model to calculate the cumulative abnormal

For each repurchasing firm, the market model is estimated by using 250 days of

return data, from 270 to 21 days prior to the event day. Table 3 reports abnormal share price performance surrounding the actual repurchase event day. The numbers in the main entry are the CARs for various event windows that

surround the actual repurchase event day. The numbers in parentheses are the associated pvalues. The mean CAR(-20, -1) value for all repurchasing firm is 1.87%, and it is significantly different from zero. This result suggests that firms tended to repurchase shares when their stocks relatively under-performed the market. The average CAR(0, 2) for the three-day event period is 0.448%, with a p-value of 0.004. It seems that the market responded positively to the

See Brown and Warner (1985) and Campbell et al (1997).

The market return was also used as the benchmark to calculate short-term CARs, but the tenor of the results remained the same.

actual repurchases. Although the positive responses were statistically significant, the economic magnitude was relatively small and the 0.448% of CAR(0, 2) value did not differ much from average percentage bid-ask spread.8 The 20-day return CAR(1, 20) is 0.335% and not

significantly different from zero value, which suggests that public investors, on average, cannot profit from buying these stocks even if they act immediately after the repurchase news appears on the Teletext system. In sum, the average short-term market response to actual share repurchases is not particularly significant when compared to average bid-ask spread in Hong Kong. Dittmar (2000) suggests that different firms may repurchase shares for different reasons. If the motive of an insider manager is to capture the exchange option value as described by Ikenberry and Vermaelen (1996), then one would expect the most undervalued firms to be among those with high BTMVs. Consequently, the market would respond more favorably to repurchases that are made by high BTMV or undervalued firms. On the other hand, smaller firms are usually less scrutinized by analysts and more likely to be mispriced. Hence, one

would expect the market to react more favorably to repurchases that are made by smaller firms. Therefore, the sample is divided into four sub-samples according to firm size and BTMV ratios, respectively. Size and BTMV quartile rankings are determined relative to all firms that were listed on the SEHK on the actual repurchase day. The size quartile panel shows a clear and consistent pattern across size groups. First, large firms make repurchases when their stocks have under-performed the market. Size

For example, Ahn, Bae and Chan (2001) reported that the average bid-ask spread for the 33 component stocks of the Hang Seng Index in Hong Kong is 0.47% for the period from July 1996 to June 1997.

quartiles 3 & 4 have under-performed the market by 4.07% and 3.245 %, respectively. Probably, large firms make repurchases as a response to share price declines. In contrast, small firms make repurchases even though their shares have not experienced abnormal declines. Second, smaller firms have higher abnormal returns in both initial market response and afterevent-day returns. For the smallest quartile firms, the event period CAR(0, 2) is 0.954%, and is statistically significant. In contrast, for the largest quartile firms, CAR(0,2) is slightly negative at 0.134%, but not significantly different from zero. Similarly, the smallest quartile firms experienced the highest after-event upward drift with the CAR(1,20) at 2.782%, with a p-value of 0.018. Furthermore, both CAR(0, 2) and CAR(1,20) monotonically decreases across size quartiles. Surprisingly, the CAR(1,20) for the largest quartile firms is 1.549. The abnormal returns that surround repurchases events CAR(0,2) and after repurchase events CAR(1,20) also show clear pattern across BTMV quartiles. First, glamour firms

(BTMV quartiles 3 & 4) make repurchases when their stocks have under-performed the market by 2.477% and 5.98%, respectively; whereas value firms make repurchases even though their stocks have not experience abnormal declines. Second, the initial market reaction CAR(0,2) for firms in quartile 1 (value stocks) is 1.413%, while it is 0.516% for firms in quartile 4 (glamour stocks). The after-event short-term drift CAR(1, 20) shows a similar pattern: it is 1.157% for quartile 1 and 2.965% for quartile 4. These results indicate that the market reacts more favorably to value stocks than glamour stocks. To further analyze the nature of the market reactions, cross-sectional regression analyses are performed. Specifically, for those firms that have BTMV ratios in the Datastrem (n = 800), the cumulative abnormal returns CAR(0,2) and CAR(1,20) are regressed on firm size

10

and BTMV. To control for possible mean reversion that might arise from the average negative returns that were experienced before the events, CAR(-20,-1) is included in the regression. The results are reported in Table 4. The numbers in the main entry are the regression coefficients. The numbers in parentheses are the associated p-values. Lsize is the natural logarithm of market value of equity. Both size and book-to-market value (BTMV) are

measured on the repurchase event day. It can be seen that event-period return CAR(0,2) is significantly related to the BTMV ratio, even after controlling for prior return CAR(-20,1). The after-event performance CAR(1,20) is positively related to BTMV but negatively related to firm size. The cross-sectional analyses are consistent with those of size and BTMV quartiles that are reported in Table 3. The results suggest that the market reacts more favorably to small and value firms when they make actual share repurchases. Although it seems that on average shortterm market responses to actual share repurchases are not particularly significant, a clear and consistent pattern is evident across firm size and BTMV ratios. For small and value firms, the abnormal returns are both economically and statistically significant.

IV. Long-Term Price Performance The value of the exchange option embedded in an open-market share repurchase program depends on the ability of managers to detect and take advantage of valuation errors, especially over a long-term horizon. Monthly windows up to one, two, and three years are used to investigate long-term price performance following the actual repurchase month. Unlike in the case of accessing short-term abnormal returns, long-term abnormal price performance

11

can be very sensitive to the benchmark and the procedure that is used (see, e.g., Barber and Lyon (1997), Canina et al. (1998), and Kothari and Warner (1997)). Barber and Lyon

(1997), among others, argue that a simple buy-and-hold return should be used to measure longrun abnormal stock returns. They analyze the power and specification of test statistics for detecting long-run abnormal stock returns under three measurement benchmarks: reference portfolios, control firms, and the Fama-French three-factor model. They find that the control firm approach yields well-specified test statistics for detecting long-run abnormal stock returns. This paper follows the Barber and Lyon (1997) suggestion to measure long-term stock performance after repurchase events. Table 5 reports buy-and-hold returns (BHRs) following actual share repurchase events up to three years. Buy-and-hold abnormal returns (BHARs) are calculated relative to matched control firms based on both firm size and BTMV. A sample firm is matched to a control firm by first identifying all firms with a market value of equity that is between 70% and 130% of the market value of equity of the sample firm, and then choosing the firm with the BTMV that is closest to that of the sample firm. It can be seen from Table 5 that the average one-, two-, and three-year BHARs are 2.02, 1.82, and 1.39%, and are not significantly different from zero. The sample is further divided into two sub-sample periods: Sept-93 to Aug-95 and Sept-95 to Aug-97. The qualitative results are similar across those two sub-periods. Overall, the evidence suggests that insider managers do not exhibit superior performance when they make open-market actual repurchases. Dittmar (2000) finds that firms repurchases shares for various reasons, the most important of which is undervaluation. ILV (1995) argue that if undervaluation is an important motive, then it should be particularly important for high BTMV stocks. Although the long-run

12

stock return performance for firms that make actual repurchases does not, on average, differ from the benchmark, will this be true across different BTMV portfolios? With this question in mind, the BHARs are examined according to BTMV ratio quartile rankings. All listed firms on the Stock Exchange of Hong Kong are used to determine the BTMV quartile cut-off values each June and December. All sample firms are sorted into BTMV quartile relative to the cut-off values at the event day. Table 6 reports BHARs by BTMV quartiles. For value (highest BTMV) firms, the BHARs are 2.31, 7.84, and 20.65% for the one-, two-, and three-year periods. They are positive and increase with the holding horizon. Furthermore, the three-year BHAR is statistically different from zero. However, the BHARs for other three BTMV quartile firms are not significantly different from zero at the conventional 1% or 5% levels. As we move from value stocks toward glamour stocks, long-run BHARs decline in general. The differences across BTMV quartiles are quite astonishing. Take the three-year horizon as an example: the BHARs varies from 18.75% for glamour stocks in the forth quartile to 20.65% for value stocks in the first quartile.

V.

Conclusions This paper investigates the stock price performance after actual share repurchases. On

average, repurchasing firms do not exhibit strong superior abnormal performance either initially or over long horizons when they make actual share repurchases. However, the performance of insider managers varies across firm size and book-to-market value ratios, and shows a clear and consistent pattern. The market responds the most favorably to repurchases that are made

13

by small and value (or high book-to-market value) firms. Over a long horizon, there is strong evidence that the managers of value firms can deliver superior performance to long-term shareholders. The three-year buy-and-hold abnormal return, which is measured against a portfolio of control firms that are matched by size and book-to-market value ratios, is over 20%. Firms may repurchase their own shares for different motives such as altering capital structure, cumulating shares for employee stock option plans, fending off taking over threats, distributing excess capital, taking advantage of undervaluation, etc. If the motive of an insider manager is to capture the exchange option value as described in Ikenberry and Vermaelen (1996), then one would expect the most undervalued firms to be among those with high bookto-market value firms. This study shows that at least for high book-to-market value firms, for which undervaluation is more likely to occur, insider managers can detect and size some of those opportunities when their shares are relatively undervalued and make repurchases to benefit long-term shareholders.

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References Ahn, Hee-Joon, Kee-Hong Bae, and Kalok Chan, 2001, Limit orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong, Journal of Finance 56(2), 767-788. Barber, Brad M., John D. Lyon, 1997, Detecting Long-run Abnormal Returns: The Empirical Power and Specification of Test Statistics, Journal of Financial Economics 43, 341-372. Barham, Sarrah, Ian, Hallsworth and Maria Jackson, 1998, The Practitioners Guide to the Listing Rules, 4th ed., Hong Kong: ISI Publications. Brockman, Paul and Dennis Y. Chung, 2001, Managerial Timing and Corporate Liquidity: Evidence from Actual Share Repurchases, Working Paper, Department of Accountancy, Hong Kong Polytechnic University. Brown, Stephen J., Jerold B. Warner, 1985, Using Daily Stock Returns: The Case of Event Studies, Journal of Financial Economics 14, 3-31. Canina, Linda, Roni Michaely, Richard Thaler and Kent Womack, 1998, Caveat Compounder: A Warning About Using the Daily CRSP Equal Weighted Index to Compound Long Run Excess Returns, Journal of Finance 53(1), 403-416. Campbell, John Y., Andrew W. Lo and A. Craig MacKinlay, 1997, The Econometrics and Financial Markets, Princeton, New Jersey: Princeton University Press. Comment, Robert, and Gregg A. Jarell, 1991, The Relative Signaling Power of Dutch Auction and Fixed Price Tender Offers and Open Market Share Repurchases, Journal of Finance 46, 1243-1271. Cook, Douglas O., Laurie Krigman and J. Chris Leach, 1999, On the Timing and Execution of Open Market Repurchases, Working Paper, University of Colorado. Dann, Larry Y., 1981, Common Stock Repurchases: An Analysis of Return to Bondholders and Stockholders, Journal of Financial Economics 9, 113-138. Dittmar, Amy K., 2000, Why do Firms Repurchase Stock? Journal of Business 73(3), 331355. Ikenberry, David, Joself Lakonishok, and Theo Vermaelen, 1995, Market Underreaction to Open Market Share Repurchases, Journal of Financial Economics 39, 181-208. Ikenberry, David, and Theo Vermaelen, 1996, The Option to Repurchase Stock, Financial Management 25(4), 9-24.

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Ikenberry, David, Joself Lakonishok, and Theo Vermaelen, 2000, Share Repurchases in Canada: Performance and Strategic Trading, Journal of Finance 55(5), 2373-2397. Kothari, S. P., Jerold B. Warner, 1997, Measuring Long-horizon Security Price Performance, Journal of Financial Economics 43, 301-340. Stephens, Clifford P., Michael S. Weisbach. Actual Share Reacquisitions in Open-market Repurchase Programs. Journal of Finance 53(1), February 1998, p. 313-333. Stock Exchange of Hong Kong, 1989, Rules Governing the Listing of Securities, 3rd ed., Hong Kong: Stock Exchange of Hong Kong. Stock Exchange of Hong Kong, September 1993 -- August 1997, Share Repurchase Report - Securities (Disclosure of Interests) Daily Summaries, Hong Kong: Stock Exchange of Hong Kong. Vermaelen, Theo, 1981, Common Stock Repurchases and Market Signaling, Journal of Financial Economics 9, 139-183.

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Table 1 Summary statistics of share repurchase activities in Hong Kong from September 1993 to August 1997. The sample consists of all open-market share repurchases that were made by all listed firms during the sample period. Number of firms Number of daily repurchases Total number of shares repurchased Total dollar value repurchased Number of firms with 1 repurchase day Number of firms with 2-10 repurchase days Number of firms with 11-20 repurchase days Number of firms with 21-40 repurchase days Number of firms with over 40 repurchase days Average repurchase days per firm 150 3850 1,648,619,566 5,897,213,178 6 (4.3%) 50 (33.3%) 36 (24.0%) 32 (21.3%) 26 (17.3%) 25.7

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Table 2 Descriptive statistics for open market share repurchases from September 1993 to August 1997. The first repurchase day is taken as the event day when a firm makes multiple purchases within a month. Size (market value) and book-tomarket value (BTMV) ratio quartile rankings are determined relative to all firms listed on the Stock Exchange of Hong Kong on the actual repurchase day.

Year

Repurchase events 15 244 302 168 112 841

Size Quartile (n=841)

BTMV Quartile (n=800)

1 (small) 3 34 49 26 20 132

2 0 77 85 51 30 243

3 6 73 108 54 31 272

4 (large) 6 60 60 37 31 194

1 (high) 6 62 85 36 27 216

2 2 84 79 48 32 245

3 3 66 95 31 29 224

4 (low) 0 22 34 42 17 115

1993 1994 1995 1996 1997 All years

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Table 3 This table reports abnormal share price performance surrounding the actual repurchase event day. Cumulative abnormal returns (CARs) are measured relative to the market model. The beta coefficient in the market model for each firm is estimated by using 250 days of return data from 270 to 21 days prior to the event day. Size (market value) and book-to-market value (BTMV) ratio quartile rankings are determined relative to all firms listed on the Stock Exchange of Hong Kong on the actual repurchase day. The numbers in the main entry are the CARs for various event windows surrounding the actual repurchase event day. The numbers in parentheses are p-values.
n (-20,-1) Full Sample (n=841) -1.871 (0.000) By Size Quartile 0.249 (0.833) 0.530 (0.491) -4.072 (0.000) -3.235 (0.000) By BTMV Quartile -0.071 (0.928) -0.888 (0.198) -2.477 (0.001) -5.980 (0.000) Window (0,2) 0.448 (0.004) 0.954 (0.037) 0.784 (0.009) 0.317 (0.239) -0.134 (0.608) 1.413 (0.000) 0.656 (0.014) -0.283 (0.306) -0.516 (0.242) (1,20) 0.335 (0.405) 2.782 (0.018) 1.377 (0.074) -0.440 (0.527) -1.549 (0.022) 1.157 (0.142) 0.377 (0.584) 1.155 (0.105) -2.965 (0.009)

CAR P-Value CAR P-Value CAR P-Value CAR P-Value CAR P-Value CAR P-Value CAR P-Value CAR P-Value CAR P-Value

841

132 243 272 194

1 (Small) 2 3 4 (Large)

216 245 224 115

1 (High) 2 3 4 (Low)

Table 4 The relations among cumulative abnormal returns (CARs) after actual share repurchases, firm characteristics, and prior share price performance. The CARs are measured relative to the market model. The numbers in the main entry are regression coefficients. The numbers in parentheses are p-values. Lsize is the natural logarithm of market value of equity. Both size and book-to-market value (BTMV) are measured on the repurchase event day. There are 800 observations in the sample.

Dependent Variable: CAR(0, 2) Intercept 0.005 (0.005) 0.018 (0.032) -0.005 (0.106) 0.006 (0.484) 0.006 0.695 -0.002 (0.193) CAR(-20, -1) 0.013 (0.391) -0.002 (0.095) 0.007 (0.001) 0.007 (0.001) Lsize BTMV F-Statistic 0.740 (0.391) 2.79 (0.095) 12.18 (0.001) 4.70 (0.003)

Dependent Variable: CAR(1, 20) Intercept 0.006 (0.136) 0.077 0.030) -0.017 (0.024) CAR(-20,-1) 0.132 (0.000) -0.011 (0.000) 0.015 (0.002) Lsize BTMV F-Statistic 14.21 (0.000) 14.15 (0.000) 9.83 (0.002)

20

0.053 (0.013)

0.113 0.001

-0.009 (0.003)

0.005 (0.014)

10.93 (0.000)

21

Table 5 This table reports buy-and-hold returns (BHRs) following actual share repurchase events up to three years. Buy-and-hold abnormal returns (BHARs) are calculated relative to matched control firms based on both firm size and book-to-market value (BTMV) ratio. A sample firm is matched to a control firm by, first identifying all firms with a market value of equity that is between 70% and 130% of the market value of equity of the sample firm, and then choosing the firm with the BTMV ratio which is closest to that of the sample firm.

n Repurchase firms Control firms Difference P-value 813

Year 1 Full Sample 6.21 4.19 2.02 (0.402) Sep-93 to Aug-95 0.35 -0.15 0.50 (0.833) Sep-95 to Aug-97 14.49 10.32 4.18 (0.382)

Year 2 16.32 14.50 1.82 (0.633)

Year 3 1.01 2.40 -1.39 (0.732)

Repurchase firms Control firms Difference P-value

476

32.86 33.57 -0.71 (0.896)

22.70 20.09 2.61 (0.652)

Repurchase firms Control firms Difference P-value

337

-7.04 -12.44 5.40 (0.293)

-29.64 -22.59 -7.05 (0.192)

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Table 6 This table reports buy-and-hold returns (BHRs) by book-tomarket value (BTMV) quartile ranking following actual share repurchase events up to three years. All listed firms on the Stock Exchange of Hong Kong are used to determine the BTMV quartile cut-off values each June and December. All sample firms are sorted into BTMV quartile relative to the cut-off values at the announcements. Buy-and-hold abnormal returns (BHARs) are calculated relative to matched control firms based on both firm size and BTMV. A sample firm is matched to a control firm by first identifying all firms with a market value of equity between 70% and 130% of the market value of equity of the sample firm, and then choosing the firm with the BTMV ratio which is closest to that of the sample firm.

Repurchase firm Reference Portfolio Diff P-value Repurchase firm Reference Portfolio Diff P-value Repurchase firm Reference Portfolio Diff P-value Repurchase firm Reference Portfolio Diff P-value

n 216

BTMV 1 (High)

Year 1 11.26 8.95 2.31 (0.653) 8.03 1.10 6.93 (0.059) 3.24 1.54 1.70 (0.703) -1.16 7.24 -8.40 (0.252)

Year 2 40.06 32.22 7.84 (0.421) 10.31 8.47 1.84 (0.708) 16.37 11.76 4.61 (0.498) -15.07 -0.06 -15.00 (0.113)

Year 3 12.46 -8.19 20.65 (0.001) 14.03 22.53 -8.50 (0.358) -7.33 -1.73 -5.61 (0.418) -31.60 -12.86 -18.75 (0.056)

249

232

116

4 (Low)

23