ABNORMAL RETURNS PRE-REPURCHASE: A NEW LOOK AT RETURNS, RISK AND OPERATING PERFORMANCE ABOUT REPURCHASE EVENTS

Abstract

Previous studies in repurchase events have tended to focus on the abnormal returns about the repurchase event and the long term drift in returns thereafter. While negative cumulative abnormal returns in the 20 to 40 days before the repurchase event have been noted, there has been no complete study of firm returns and operating performance before a repurchase event thus far. This study fills a gap in the repurchase literature in the investigation of pre-repurchase returns and operating performance of firms. Building on previous studies, I find strong evidence that repurchasing firms experience lower returns compared to matched control firms in the 12 months before the repurchase announcement. This effect is consistent across B/M and size quintiles. I also find evidence that repurchasing firms experience a decline in operating performance in the fiscal year before the repurchase, consistent with the implications of a recent study conducted by Gong, Louis and Sun (2008) who find evidence of downwards earnings management pre-repurchase. I hypothesize that the returns underperformance pre-repurchase may be partially driven by this decline in operating performance and investor over-reaction to it. I find in my regressions that the post-repurchase returns of firms which experience the largest decline in operating performance are negatively dependent on pre-repurchase changes in accounting performance, suggesting that investors over-react to changes in accounting performance for this particular group of firms.