The Persistence of Long-Run Abnormal Stock Returns: Evidence from Stock Repurchases and Offerings

Are Buybacks Good for Long-Term Shareholder Value? Evidence from Buybacks around the World

“…Only in the United States are excess returns consistent with the relevance of takeover risk as well as improved market efficiency. However, in contrast to Fu and Huang (2015) but consistent with Lee, Park, and Pearson (2015), long-term excess returns have not disappeared in recent years. Combined with the earlier literature (i.e., Peyer and Vermaelen (2009), Ikenberry et al (1995)), our results provide evidence of significant market underreaction to buybacks in the United States going back 35 years and outside the United States since 1998.…”

“…In this section, we first test whether firms outside the United States exhibit positive long-run abnormal returns, as documented for the United States (Ikenberry et al (1995), Peyer and Vermaelen (2009)). We then test whether these abnormal returns can be explained by subsequent takeovers or takeover risk, as argued by Bargeron et al (2017) and , and whether they disappear in recent years, as suggested by Fu and Huang (2015). Next, we test whether excess returns are driven by the market overreacting to recent bad news, as proposed by Peyer and Vermaelen (2009), or whether the market overestimates the risk of cash flows, as argued by Grullon and Michaely (2004).…”

“…In contrast to previous, country-specific studies or studies limited to a small number of countries, we use both a uniform methodology and a common period and investment horizon. Third, we test whether recent findings on U.S. data suggesting that long-term returns capture takeover risk (Bargeron et al (2017), ) and that they have disappeared in recent years (Fu and Huang (2015)) are robust in an international setting. We find that takeovers, exposure to takeover risk, and improved market efficiency in recent years do not appear to explain the longterm performance of buyback stocks outside the United States.…”

“…At the same time, long-term excess returns are an anomaly, and anomalies can be the result of data mining or chance. Moreover, recent studies argue that the long-term returns can be explained by takeover activity or may compensate investors for takeover risk exposure and thus do not create value (Bargeron, Bonaime, and Thomas (2017), Lin, Stephens, and Wu (2014)) or that they have strongly declined in recent years due to improved market efficiency (Fu and Huang (2015)). In sum, some recent literature is less supportive of the argument that share buybacks are associated with higher shareholder value in the long run.…”

Executive Compensation and Horizon Incentives: An Empirical Investigation of Corporate Cash Payout

“…In examining the share repurchase activities in the banking industry,Banyi, Porter, and Williams (2010) find that banks that received funds from the Troubled Asset Relief Program (TARP) returned a higher proportion of their available capital to shareholders in the periods leading up to the financial crisis than banks that did not. 3 A recent study byFu, Huang, and Lin (2011) finds that the open market repurchase anomalies, as reported byIkenberry, Lakonishok, and Vermaelen (1995), disappeared for the period of 2003-2010 for all repurchasing firms covered in Compustat. This finding suggests that firms in that period on average might not buy back shares that were as undervalued as in earlier periods shown inPeyer and Vermaelen (2009).…”