ACCELERATED SHARE REPURCHASES DO NOT SIGNAL UNDERVALUATION: EXPLAINING A FIRM’S CHOICE OF ADOPTING ACCELERATED SHARE REPURCHASE OVER OPEN MARKET SHARE REPURCHASE

Abstract

Since 2005, accelerated share repurchases (ASR) have become an increasingly popular alternative to traditional forms of share buybacks such as open market share repurchases (OMR), fixed price tender offers and Dutch auctions. A firm conducting an ASR commits to purchase all of its targeted number of shares in its entirety at a specific price and date with the help of an investment bank intermediary who borrows the shares from its clients. Firms’ motivation behind ASR is currently still being debated. This thesis is a study to reconcile conflicting evidence surrounding the issue of whether ASR programs signal undervaluation, by employing a recent innovation developed by Rhodes-Kropf, Robinson and Viswanathan (2005) to decompose a firm’s market-to-book ratio into misvaluation and growth opportunities. I find that ASR does not signal firm-specific or sector-wide undervaluation and ASR firms do not lack growth options. In contrast, OMR signal undervaluation but their sectors are not undervalued, and they have significantly higher investment opportunities than their control firms. Additionally, firms intending to buy back their own shares may elect to conduct an ASR over an OMR when it has significantly fewer investment opportunities as well as when its own shares and industry sector are at a higher valuation. The long-run growth options component of a firm’s M/B ratio could be a more sensitive growth proxy than M/B ratio, R&D expenses and capital expenditure.