Mixed Messages: Open‐Market Repurchases Following Stock Acquisitions

Abstract

Management decisions and market reactions to those decisions do not occur in isolation. Despite this fact, little or no research has examined two events when they occur in a sequence, even when theory suggests that those two events convey opposite signals. We examine firms that do a stock-based acquisition then announce an open-market repurchase program. These two actions, according to the signaling theory, signal conflicting valuation errors. This paper is the first to examine a sequence of events that convey seemingly conflicting signals. Among other results, we find that repurchasers who had previously made a stock-based acquisition have a less positive market reaction than do otherwise comparable repurchasers with no previous acquisition. These results indicate that the market reactions to events are tempered by previous information-releasing events.

Valuation and Performance of Reacquisitions Following Equity Carve‐Outs

“…Our results are consistent with empirical evidence on repurchases (e.g., Vermaelen, 1981;Ikenberry, Lakonishok, and Vermaelen, 1995;Grullon and Michaely, 2004). Along these lines, Howell and Payne (2004) examine firms that conduct a stock-based acquisition to subsequently announce an open-market repurchase program. They find that repurchasers who had previously made a stock-based acquisition have a less positive market reaction than do otherwise comparable repurchasers with no previous acquisition.…”

The information content of open-market repurchase announcements in Taiwan

“…In addition, we find that firms with a lower leverage ratio experience higher announcement effect. This is supported by Howell and Payne (2004), who contend that firms with more leverage have smaller announcement returns. Finally, announcement effect is significantly and positively related to past cumulative excess returns, indicating that higher past excess returns lead to a greater announcement effect.…”

“…Following past literature such as Vermaelen (1984), Nohel andTarhan (1998), McNally (1999), Ikenberry et al (1995Ikenberry et al ( , 2000, Maxwell and Stephens (2003), Hatakeda and Isagawa (2004), Howell and Payne (2004), Jung et al (2005), Liao et al (2005), Massa et al (2007), and Firth et al (2010), we include firm size (Size), 5 book-to-market ratio (BTM), 6 stock return volatility (StdRtn), 7 leverage ratio (Leverage), 8 binary variable for technique sector (Tech), 9 insider ownership (Insider), 10 cumulative abnormal returns prior to the announcement (CAR20B), 11 and return of assets (ROA) 12 as control variables emphasized by the aforementioned studies. The data used here to calculate control variables are adopted; Table A1 shows a detailed description of the construction of all variables used in this study.…”

“…11 Comment and Jarrell (1991) argue that abnormal stock returns following the announcement is inversely related to stock returns preceding the announcement, especially when the preannouncement return is measured over a relatively short period. 12 Hatakeda and Isagawa (2004) and Howell and Payne (2004) mention that more profitable firms have smaller announcement returns.…”

Why do firms repurchase stock to acquire another firm?

“…As an aside, Howell and Payne (2004) also look at stock-based acquisitions and repurchases jointly. They examine 56 firms that complete a stock-financed acquisition and then later follow up with a repurchase initiative.…”