AN EMPIRICAL STUDY OF SHARE REPURCHASE AND FUTURE STOCK PRICE MOVEMENT

Abstract

Our study attempts to address some of the mysteries that surround open market share repurchase programs. Amongst the three different types of share repurchase programs, open market share repurchase is the most elusive as the reasons behind the announcement are not always clear to the investors. Furthermore, there is a lack of regulation in the U.S. to ensure that companies that announce share repurchase programs see through to the completion of these programs. This gives managers of the firm an option to secretly withdraw from the program or even announce share repurchase programs without having the intention to fulfill them. In other words, it allows the management to create a valuable option with unknown value. The presence of agency problems means that open market share repurchase programs can be motivated by selfish reasons and it is essential for investors to be discerning and pick only firms that announce share repurchase programs due to value-creating reasons. In this study, we attempt to address this problem by investigating ways to identify true signals of unexpected future earnings performance and undervaluation associated with open market share repurchase programs. Firms that send these signals are likely to find an improvement in future share price performance and to generate stock excess return which is desired by both the management and investors.