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Share Price Performance Following Actual Share Repurchases

Share Price Performance Following Actual Share Repurchases

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Published by: blacksmithMG on Sep 09, 2012
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Share Price Performance Following Actual Share Repurchases
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Current version: Nov. 25, 2002JEL classification: G32, G35Hua ZhangDepartment of FinanceThe Chinese University of Hong KongShatin, N.T., Hong Kong(852) 2609-7760 (tel.)(852) 2603-6586 (fax)
hzhang@cuhk.edu.hk 
 
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The author would like to thank Hugh Thomas, Yangru Wu and seminar participants at Peking University for theirhelpful 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.
 
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Share Price Performance Following Actual Share Repurchases
Abstract Using actual share repurchase data from Hong Kong, this paper investigatesshare price performance following actual share repurchases. On average, repurchasing firms donot exhibit superior abnormal performance either initially or over long horizons when they makeactual share repurchases. However, the price performance of repurchasing firms varies acrossfirm size and market-book value ratios, and shows a clear and consistent pattern. The marketresponds the most favorably to repurchases that are made by small and value (high book-to-market value) firms. Over a long horizon, there is strong evidence that managers of value firmscan deliver superior performance to long-term shareholders. The three-year buy-and-holdabnormal return, which is measured against a portfolio of control firms that are matched by sizeand book-to-market value ratios, is over 20%. At least, repurchases made by high book-to-market value firms, for which undervaluation is more likely to occur, can benefit long-termshareholders.
 
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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
announcements
(see, e.g.,Comment and Jarrel (1991), Dann (1981), ILV (1995), and Vermaelen (1981))
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The marketreaction to the announcements of these programs is on average about 3.5% in the U.S.
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 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
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. 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
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See, e.g., ILV (1995).
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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.

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