Abstract - The Nature and Persistence of Buyback Anomalies

We document that the anomalies around tender offer and open market share repurchases still exist. Using more recent data on share repurchases, we reject the hypothesis that the market has become more efficient and eliminates apparent inefficiencies. As a possible explanation for the profitable trading strategy around tender offer expiration dates, we propose that the market might mistakenly price the stock at an average price, instead of at the marginal price. Furthermore, we find long-run abnormal returns persist after self-tender as well as open market repurchase announcements. The abnormal returns after open market repurchases are highest for loosers, i.e., firms with very negative returns in the six months prior to the repurchase announcement. This offers a explanation why firms do not seem to increase their operating performance around repurchase while the repurchase still is an information driven event. Managers seem to react to a market that overreacted by beating the stock price down – not to inside information about the operating performance improving. Furthermore, we find evidence of higher long-run abnormal returns for firms that state at the announcement that their repurchase is motivated by “undervaluation”. On the other hand, firms that say they repurchase to “reduce dilution” or “increase earnings-per-share” do no display positive abnormal returns after the announcement. We conclude that the market still underreacts to the information in share repurchase announcements.

Urs Peyer
31.May 2005

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