Share Price Performance Following Actual Share RepurchasesI. Introduction
Open market share repurchases are one of the common ways for corporations todistribute cash flows to their shareholders. The popularity of open market share repurchases inthe U.S. market has been documented by Ikenberry, Lakonishok and Vermaelen (1995:hereafter, ILV), Stephens and Weisbach (1998), and Vermaelen (1981), among others. Theseprograms represent 90% of all announced repurchase programs in the U.S. Many studies haveinvestigated the market reaction to open-market share repurchase
(see, e.g.,Comment and Jarrel (1991), Dann (1981), ILV (1995), and Vermaelen (1981))
The marketreaction to the announcements of these programs is on average about 3.5% in the U.S.
However, the announced share repurchase programs are not firm commitments, and areoften not fully implemented. In some cases, only small percentages of the announced shares areacquired
. Ikenberry and Vermaelen (1996) argue that these programs effectively representexchange options that provide the firm with the flexibility to exchange its market value for its“true” value at the management’s discretion. Even if the management has no superiorinformation or the market price of the stock is “fair” at the time of the repurchaseannouncement, the stock price should increase to recognize the option value that is created bythe 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 announcedtarget amount of shares, but 10% of the firms repurchase 5 percent or less within three years of the announcement.