A re-examination of stock repurchase in USA.
详细信息
文摘
Since the adoption of U.S. Securities and Exchange Commission SEC) Rule 10b-18 Safe Harbor for Issuer Repurchases in 1982, stock repurchases have been growing explosively. Extant literature has shed some light on the motivation behind companies repurchase activities. The most popular beliefs include signaling undervaluation Dann 1981, Vermaele 1981, Comment and Jarrell 1991), reducing free cash flow Guay and Harford 2000, Jagannathan, Stephens and Weisbach 2000, Grullon and Michaely 2004), raising leverage ratio Hovakimian, Opler and Titman 2001) and increasing earnings Bens, Nagar, Skinner and Wong 2003). Motivated by Stephens and Weisbachs 1998) research which found that companies on average acquire 74 to 82 percent of the shares announced as repurchase targets within three years of the repurchase announcement, I re-examined the motivations for stock repurchase by linking repurchase announcements with actual repurchases: 1) why some companies announce stock repurchase, but dont actually buy back any of their shares, and 2) why some companies complete the repurchase program as announced. Applying Logit regression to investigate the motives, I find that companies which make repurchase announcements but not actually buy back any stock tend to use announcements to signal undervaluation, so they dont need to actually purchase their stocks to covey the insider information once again. On the other side, those companies which complete repurchase programs are more likely to buy back shares to reduce free cash flow, raise leverage ratio or improve earning per share. And they have to actually repurchase their own stocks to achieve those purposes. I also examine market reaction to announcements made by Non-Repurchaser and Repurchaser. Non-Repurchaser receives more favorable market responses than Repurchaser. It provides further support to my hypothesis that Non-Repurchaser is undervalued and market corrects the mistake after the repurchase announcement.