Why Do Firms Announce Open Market Repurchase Programs

Oded, Jacob

doi:10.2139/ssrn.291164

Cited by 26 publications

(25 citation statements)

References 32 publications

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“…The signaling theories suggest that an effective signal must be costly, so that those firms that are truly undervalued can be distinguished from mimicking firms and a share repurchase is a costly signal because it distributes cash back to shareholders (Oded ). Managers prefer share repurchases as they are more flexible than dividends and they can use this flexibility to time the market by increasing (or initiating) repurchases when their company's stock price is low (Brav et al.…”

Section: Prior Studiesmentioning

confidence: 99%

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Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia

Akyol

Foo

2012

Int Rev Finance

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Using repurchase reasons provided by Australian companies for their stock repurchase programs, we ask if the market's response is different across repurchase motivations by examining actual daily share repurchases. We find that firms with the undervaluation motive experience a more positive stock price reaction when they report their repurchases to the market. We show that undervaluation motive firms repurchase fewer shares and have a lower program completion rate than other motives firms. During the 1‐year period following the repurchases, undervaluation motive firms do better than their control sample firms whereas other motive firms do not perform better or worse than their control sample firms. Overall, our results suggest that the undervaluation motive is a stronger signal than other repurchase motives, and contrary to the predictions of the standard signaling theories, management statements carry some value for the market. We also present some evidence suggesting that a costly action may not be needed for a signal to be credible.

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Section: Prior Studiesmentioning

confidence: 99%

“…See, for example, Dittmar (), Konan et al. (), Oded (), Billett and Xue () in the United States and Mitchell and Dharmawan () in Australia.…”

mentioning

confidence: 99%

Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia

Akyol

Foo

2012

Int Rev Finance

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“…The announcement of an open‐market repurchase program, however, does not constitute a commitment to repurchase, which is needed for signaling results. See, however, Oded () and Peyer and Vermaelen ().…”

mentioning

confidence: 99%

Payout policy, financial flexibility, and agency costs of free cash flow

Oded

2019

Business Fin & Account

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This paper explains how firms choose between dividends and open‐market repurchase programs, the prevailing method that firms use to disburse cash today. While earlier theories about payout policy are motivated by signaling, the motivation for payout in this paper is to prevent the waste of free cash by self‐interested insiders. In the model, dividends prevent free cash waste by forcing cash out, but result in underinvestment if the cash paid out is later needed for operations. Open‐market programs stimulate payout by providing personal gains to informed insiders that are associated with the firm's repurchase trade. Yet, they also avoid the underinvestment problem by leaving insiders the option to cancel the payout. Because their execution is optional, however, open‐market programs only partially prevent the waste of free cash. The model provides testable predictions that are generally consistent with the empirical evidence.

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“…The undervaluation‐signaling explanation is another interpretation. The undervaluation‐signaling explanation suggests that managers use share repurchases to signal that the stock of their firm is underpriced based on publicly available information (Oded, ). Consistent with Oded's (2005) argument, Peyer and Vermaelen () find that open‐market share repurchases are responses from companies to the market overreaction to bad news prior to the announcement.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

“…Under this hypothesis, share repurchases are associated with positive announcement excess returns because managers use share repurchases to convey favorable private information about their firm's future prospects—the performance‐signaling explanation (Vermaelen, ). The second interpretation is that the market is inefficient and managers use share repurchases to signal that their stock is undervalued based on publicly available information—the undervaluation‐signaling explanation (Oded, ). The undervaluation‐signaling hypothesis suggests that repurchases do not signal improvements in future operating performance.…”

mentioning

confidence: 99%

Open‐Market Stock Repurchases by Insurance Companies and Signaling

Huang¹,

Liano²,

Manakyan³

et al. 2013

Risk Manage Insurance Review

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The signaling hypothesis of share repurchases implies that management uses repurchases to signal either that their firm's future operating performance will improve or that shares of their stock are simply underpriced by the market. This study examines which of the two interpretations can better explain openmarket share repurchase programs announced by insurance companies. We find no evidence that future-operating performance of insurers improves following the repurchase announcement. In addition, changes in future operating performance cannot explain the announcement-period abnormal return. Instead, the stock undervaluation prior to the repurchase announcement can significantly explain the announcement-period abnormal return, particularly for life insurers. Overall, our results suggest that the positive market reaction to insurers' open-market share repurchase announcements is due to the stock undervaluation by the market, but not due to positive information content about future operating performance conveyed in the repurchase announcement.The finance literature has documented significantly positive market reactions around announcements of open-market stock repurchase programs. The most prominent explanation for this finding is the signaling hypothesis (Vermaelen, 1981). 1 However, there are two interpretations for the positive market reaction under the signaling hypothesis.

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Why Do Firms Announce Open Market Repurchase Programs

Cited by 26 publications

References 32 publications

Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia

Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia

Payout policy, financial flexibility, and agency costs of free cash flow

Open‐Market Stock Repurchases by Insurance Companies and Signaling

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