Share repurchases of initial public offerings: motives, valuation effects, and the impact of market regulation

Equity Issues and Stock Repurchases of Initial Public Offerings

“…This finding is in line with Bessler et al . (), who report that IPO firms stockpile substantial amounts of cash prior to the announcement of an SRP.…”

“…One potential explanation is that management quickly reacts to the relative stock price decline by announcing a repurchase program, which is in line with Vermaelen's () undervaluation signaling hypothesis. The abnormal announcement return of repurchasing IPO firms of more than 8% is almost three times as high as that reported in other US studies (Vermaelen, ; Grullon and Michaely, ) and more than twice as high compared with earlier studies for the German stock market (Seifert and Stehle, ; Bessler et al ., ).…”

“…Focusing on the operating performance of US repurchasing firms for the three-year period following the announcement, Nohel and Tarhan (1998) also find support for the free cash flow hypothesis. Moreover, the free cash flow hypothesis explains share repurchases of established firms in Germany (Bessler et al, 2014). Higher institutional ownership and corporate governance issues explain the increase in SRPs in the USA over the past 25 years (Fu et al, 2012).…”

“…For established firms, undervaluation signalling and the free cash flow hypothesis are the common explanations for SRPs. For IPOs, only a few studies investigate share repurchase activities (Chen et al ., ; Bessler et al ., ). Our results suggest that the rules directly relating to the mandatory equity issuance at the IPO had a significant effect on both the SRP and SEO likelihood.…”

“…As the French 'Nouveau Marché' and Italy's 'Nuovo Mercato' it was highly regulated, in contrast to London's 'Alternative Investment Market' (AIM) which is a private placement market with minimal regulation (Vismara et al, 2012;Jenkinson and Ramadorai, 2013). In comparison to the other 'new markets', the German Stock Exchange (Deutsche Börse) imposed unique rules such as requiring firms to issue additional equity when going public (Bessler et al, 2014). For many firms this resulted in high cash holdings, as at least half of the offering proceeds had to come from issuing new shares.…”