The Persistence of Long-Run Abnormal Returns Following Stock Repurchases and Offerings

Abstract

The long-run abnormal returns following both stock repurchases and seasoned equity offerings disappear for the events in 2003–2012. The disappearance is associated with the changing market environment: increased institutional investment, decreased trading costs, improved liquidity, and enhanced regulations on corporate governance and information disclosure. In response to the more efficient pricing of stocks, firms become less opportunistic in stock repurchases and offerings. Recent events of stock repurchases and offerings are motivated more by business-operating reasons than to exploit mispricing. Both external market factors and internal firm factors contribute to the disappearance of the postevent abnormal returns. Our findings on the recent events contrast with those of earlier studies and shed light on how the changing market environment affects both asset pricing and corporate behavior. This paper was accepted by Wei Jiang, finance.

Repurchases Have Changed

“…In a contemporaneous paper, Fu and Huang (2015) also present evidence that abnormal returns following recent repurchase announcements are smaller than those following earlier repurchases; their results are actually stronger than ours, and they claim that the long-horizon post-announcement abnormal returns have disappeared. 6 However, their interpretation of their 6 In their 2003-2012 sample, Fu and Huang (2015) estimate three-year average abnormal returns of 2.52%, 2.94%, 1.89%, and 5.32% using BHARs, RATS CARs, value-weighted calendar-time portfolio returns, and equalweighted calendar-time portfolio returns, respectively (see their Table 1). The average RATS CAR of 2.94% is significantly different from zero at the 5% level.…”

“…In contrast, our Tables 2 and 3 below report positive abnormal returns, some of which are significant, using all four methodologies in both our 2002-2006 and 2007-2011 subsamples. In the RATS and calendar-time results we benchmark using the Fama-French-Carhart four-factor model, while Fu and Huang (2015) benchmark using the Fama-French three-factor model; for the BHARs we match on size, B/M, and industry while Fu and Huang (2015) match on size, B/M, and momentum. In untabulated results, we try to reproduce the Fu and Huang (2015) RATS CARs and calendar-time portfolio results by benchmarking using the same three-factor model they use, and are unable to do so.…”

The existence and persistence of financial anomalies: What have you done for me lately?

“…Financial anomalies, as published in 2003 and 2012-2013 continue to outperform. Guerard Jr., also documented the persistence of common stock issues and buybacks that were tested in Fu and Huang (2016) and Chu, Hirshleifer, and Ma (2017). See Brealey et al (2006), Elton, Gruber, Brown, and Goetzman (2007), Haugen and Baker (2010), and Levy (2012) for more recent anomalies surveys.…”

What Drives the Declining Wealth Effect of Subsequent Share Repurchase Announcements?

“…The number of frequent repurchase announcements in their sample, during the period from 1986 to 1996, accounts for about half of their total sample. Since 2003, however, the frequency of announcing subsequent open market repurchase programs is reported to have been increased substantially (Fu and Huang 2016). 3 Busch and Obernberger (2017) document that share repurchases help to maintain accurate stock prices by providing price support at fundamental values.…”