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Book part
Publication date: 4 April 2005

Jairo Laser Procianoy and Luis Fernando Moreira

This paper examines stock prices reaction to open market repurchases announcements at the São Paulo Stock Exchange between May 30, 1997 and October 31, 1998. This…

Abstract

This paper examines stock prices reaction to open market repurchases announcements at the São Paulo Stock Exchange between May 30, 1997 and October 31, 1998. This institutional scenario is a good testing ground for some theoretical hypotheses about stock repurchases announcements, because during this period there were taxes on capital gains but not on dividends. Using an event study methodology, we examined 110 episodes and found very small abnormal returns. Those results can not be explained by two main competing theoretical explanations. The Cumulative Abnormal Returns pattern found clearly suggests that repurchase announcements affected the behavior of stock prices in ways not described in previous studies.

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Latin American Financial Markets: Developments in Financial Innovations
Type: Book
ISBN: 978-1-84950-315-0

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Article
Publication date: 22 April 2008

David N. Hurtt, Jerry G. Kreuze and Sheldon A. Langsam

One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and…

Abstract

One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and financial reporting of stock options. In December 2004, the FASB issued Statement 123R, Share‐Based Payment, in the hope that the long process of revising the accounting and financial reporting for stock options will be put to rest. FASB Statement 123R requires the fair‐value‐based method of accounting for share‐based payments. In order to offset the dilutive effects of generous stock option compensation packages for employees, companies are seemingly participating in stock repurchase plans. In the past, stock buyback programs were viewed as a means of distributing excess cash flow to investors; however, it appears now that many companies are financing stock repurchases through the issuance of debt, which can significantly impact the financial flexibility of a company. So, why do companies engage in this behavior? One possible reason for stock buybacks is to reduce the dilutive effect of stock option plans. Companies have, however, disputed that there is a direct relationship between exercised stock options and stock buyback transactions. Nevertheless, several articles and studies have found that there is a relationship and the FASB seems to believe that there is an association between stock buybacks and stock options, as Statement 123R requires that companies disclose the relationship between stock buybacks and stock payment programs. Using a sample of technology firms, we find evidence of an association between exercised stock options and repurchase of stock.

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American Journal of Business, vol. 23 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 23 September 2019

Dinis Daniel Santos and Paulo Gama

Are firms able to time the market? The purpose of this paper is to focus on the study of own stock trading, emphasizing both repurchase and resell operations on the open…

Abstract

Purpose

Are firms able to time the market? The purpose of this paper is to focus on the study of own stock trading, emphasizing both repurchase and resell operations on the open market as well as over the counter.

Design/methodology/approach

The authors use data on 37,997 own stock transactions from 2005 to 2015 of Euronext Lisbon listed firms. Following Dittmar and Field (2015), this paper uses relative transaction prices to ascertain the relative performance of own stock transactions, in the open market and over the counter.

Findings

Results show that firms can time both repurchases as well as resales. Firms repurchase (resell) at lower (higher) prices than those prevailing in the market. Moreover, market-timing ability proves to be higher after the bailout period and to be influenced by the own stock trading frequency. Trading on the open market allows for increased timing ability for own stock repurchasing and reselling activity. Finally, results show seasonal effects both in repurchase and resale performance. Also, more efficient but less valuable firms are more likely to be successful in timing the market.

Originality/value

The authors study both the repurchasing and the reselling activity of the same set of firms, of already issued stock, using high-frequency (daily) data. In addition, the authors study own stock trading both in the open market and OTC, and also study the impact of a major economic shift on the firms’ ability to time the market.

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International Journal of Managerial Finance, vol. 16 no. 2
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 27 June 2008

Elizabeth Webb

The purpose of this paper is to examine the relationship between the extent of stock repurchase and measures of corporate governance.

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2534

Abstract

Purpose

The purpose of this paper is to examine the relationship between the extent of stock repurchase and measures of corporate governance.

Design/methodology/approach

Using a sample of stock repurchase announcements by banks after the 2002 tax reform, the paper uses an event study methodology to confirm the positive market response to stock repurchase announcements. A regression analysis is then used to study the determinants of the abnormal response to the bank stock repurchases. Regression analysis is also used to analyze whether corporate governance variables are significant determinants of bank extent of stock repurchases and size.

Findings

Corporate governance techniques have little impact on market response to bank stock announcements, but are related to some extent to manager decisions regarding the stock repurchase. Board structure and executive/director stock ownership do not influence the market's response to repurchases. However, in some cases board structure is positively related to management's decision regarding the extent and size of the repurchase offer. Proportion of insider equity holdings has less influence on stock repurchase characteristics.

Practical implications

Board structure may have a more important role to play in the banking industry in regards to managerial decision‐making than equity ownership. Equity ownership in banks tends to be driven by bank size and therefore may have less of an impact on reducing agency problems within the banking industry.

Originality/value

The sample is taken after the 2002 tax reform, which provides an analysis of repurchases without tax effect implications. This is the first paper to study the contribution of board structure and equity ownership to stock repurchases in publicly‐traded banks.

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International Journal of Managerial Finance, vol. 4 no. 3
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 15 July 2021

Kyung Soon Kim and Yun W. Park

Existing studies show that firms may have an incentive to use share repurchases opportunistically, thereby taking advantage of market participants’ confirmation bias that…

Abstract

Purpose

Existing studies show that firms may have an incentive to use share repurchases opportunistically, thereby taking advantage of market participants’ confirmation bias that share repurchase is a signal of undervaluation. This study aims to investigate whether signaling costs and accounting transparency can serve as tools to identify opportunistic share repurchases.

Design/methodology/approach

The authors measure signaling costs by using two share repurchase methods (direct and indirect share repurchase) with different share repurchase costs, and measure accounting transparency using the history of earnings timeliness. The authors further measure long-term performance following share repurchases using operating performance and stock returns. Lastly, the authors compare the long-term performances between the groups defined by share repurchase method and earnings timeliness level.

Findings

The authors find that indirect share repurchase firms with a history of poor earnings timeliness experience unfavorable long-term performance, while other share repurchase firms do not. This finding reinforces the view that some share repurchases may be driven by managerial opportunism. In particular, when firms with a history of poor earnings-reporting behavior choose a low-cost repurchase method, their share repurchases may be motivated by managerial opportunism.

Originality/value

The findings suggest that past earnings timeliness and the signaling costs of a repurchase together are useful predictors of false signaling. Moreover, they suggest that investors can – at least in part – predict opportunistic share repurchases by using signaling costs and accounting transparency.

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Article
Publication date: 16 August 2019

Hong Thi Hoa Nguyen, Dat Tien Nguyen and Anh Hong Pham

The purpose of this paper is to examine the effects of share repurchase announcements on the stock price of rival firms in the same industry in Vietnam during 2010–2017.

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1038

Abstract

Purpose

The purpose of this paper is to examine the effects of share repurchase announcements on the stock price of rival firms in the same industry in Vietnam during 2010–2017.

Design/methodology/approach

Both event study and t-test are employed to test the effects of share repurchase announcements on rival firms. In addition, cross-sectional analysis by ordinary least square regression is also applied for investigating the heterogeneous effects due to information transfer.

Findings

The finding shows that stock repurchase announcements result in a positive and significant valuation effect for both announcing firms and rival firms in Vietnam. Furthermore, the degree of signal to the industry is conditional on the degree of signal about the announcing firms as a contagious effect. Intra-industry effects are more favorable when profit performance of rival firms is good and when leverage of rival firms is low.

Practical implications

Rival firms can seize opportunities surrounding share repurchase announcements in the same industry in Vietnam. However, due to firm characteristics, intra-industry effects of stock repurchases differ among industries.

Originality/value

By examining different methods, the paper attributes valuable results to investigate the stock price behavior of rival firms in the same industry when firms announce stock repurchase in Vietnam.

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Article
Publication date: 1 August 2020

Anthony Chen and Hung-Yuan (Richard) Lu

In this study, the authors extend upon Brockman et al. (2008), who provide evidence that managers opportunistically accelerate bad news prior to share repurchases, but…

Abstract

Purpose

In this study, the authors extend upon Brockman et al. (2008), who provide evidence that managers opportunistically accelerate bad news prior to share repurchases, but provide limited evidence that managers withhold good news until after repurchases. The authors examine management forecasts surrounding share repurchases in periods when companies must disclose detailed repurchase information. The authors argue these disclosures increase managers' legal and reputation risks of accelerating bad news, but have a lesser effect on delaying good news.

Design/methodology/approach

First, the authors examine whether managers alter the information released to the market before buying back shares by comparing managerial forecasts made within 30 days before the beginning of a repurchasing period with those made outside of this window. Second, the authors examine whether managers are more likely to provide good news forecasts, in terms of both magnitude and frequency, after buying back shares. Lastly, the authors examine the impact of CEO stock ownership on managerial forecasting behavior surrounding share buybacks.

Findings

Consistent with the authors’ hypotheses and contrary to Brockman et al. (2008), the authors find limited evidence that the likelihood or magnitude of bad news forecasts is greater in the period before share buybacks. Instead, the authors document that the frequency and magnitude of good news forecasts increase in periods following share buybacks and that these associations are positively moderated by managerial equity incentives. The authors also find that the withholding of good news is associated with lower average repurchase prices and greater repurchase volume. The authors further show that, when litigation risk is greater, managers are less likely to accelerate bad news prior to repurchases and more likely to withhold good news until after. Overall, the study results are consistent with managers balancing the benefits of opportunistic repurchase behavior with the costs.

Originality/value

This study contributes to the management forecast and share repurchase literatures by providing evidence consistent with managers opportunistically releasing earnings forecasts in the period after buying back shares. Most importantly, the authors show that after the rule revision, managers refrain from actively disclosing bad news that carry higher legal costs. Instead, they opt for the omission of good news to repurchase stocks at lower prices. The study results reconcile the conflicting evidence of Brockman et al. (2008) and Ge and Lennox (2011).

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Asian Review of Accounting, vol. 28 no. 4
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 12 August 2014

Wei Chieh Liang, Yao Chun Tsao, Wen Kuei Chen, Hsing Chau Tseng and Ke Jian Yu

– The purpose of this paper is to integrate Modigliani-Miller (MM) theory and stock repurchases strategy to procure a practical concept for capital decision.

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620

Abstract

Purpose

The purpose of this paper is to integrate Modigliani-Miller (MM) theory and stock repurchases strategy to procure a practical concept for capital decision.

Design/methodology/approach

No-arbitrage proof model deduction was used in this study. The authors consider corporate tax and funding sources as two crucial factors drawn in the model. The paper derives some propositions by trichotomy property and keeps the key assumptions of MM Capital Structure Theory.

Findings

There are two different effects on firm's value through stock repurchases. The positive effect occurs on firm's value through stock repurchases with loan fund. And the negative impact exists on firm's value through stock repurchases with idle fund.

Research limitations/implications

Notably, in the real world there are three limitations with such an arbitrage transaction (Stulz, 2000). The first one is the default risk, and the second one is transaction costs and the last one is the perfect credit market assumption. In the near future, the authors suggest it would be interesting to involve the interest rate factor and contingent tax variable into our model.

Originality/value

On the basis of no arbitrage opportunity, this paper considers both trichotomy property and MM theory. It proves the share repurchase strategy should be financed by borrowing fund. In contrast, share repurchase should not be executed with idle fund because of opportunity cost.

Details

Management Decision, vol. 52 no. 7
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 1 May 1992

Michael S. Long, Ileen B. Malitz and Stephen E. Sefcik

We provide evidence of stock market performance prior to announcements of the assuance or retirement of securities which is consistent with Myers and Majluf [1984] and…

Abstract

We provide evidence of stock market performance prior to announcements of the assuance or retirement of securities which is consistent with Myers and Majluf [1984] and Miller and Rock [1985]. Stocks of firms issuing seasoned common equity are significantly over‐valued in the market prior to the issue, but in the year following, decline to their original level. Stocks of firms issuing convertible debt also are over‐valued, but to a lesser degree than that of firms issuing seasoned equity. Stock of firms issuing straight debt appears to be neither over‐valued nor undervalued. The after‐market firm performance, measured by earnings, cash flows or dividends, is consistent with Miller and Rock. We document a decline in after‐market performance for firms issuing convertible or straight debt and an improvement for those repurchasng shares. However, contrary to predictions, we find that firms issuing seasoned equity do not have lower earnings or cash flows in the following year, and increase their rate of dividend payment as well. We document evidence indicating that firms issue equity to maintain or increase dividends. The market anticipates the dividend increase and shows no response to announcements of dividend changes following an equity issue. However, we are unable to explain why the market reacts in such a negative manner to equity issues, when the after‐market performance of the firm is as expected.

Details

Managerial Finance, vol. 18 no. 5
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 21 June 2013

H. Kent Baker, Bin Chang, Shantanu Dutta and Samir Saadi

The purpose of this paper is to examine cash dividends and stock repurchases in Canada from 1988 to 2006 and their relationship with earnings.

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1412

Abstract

Purpose

The purpose of this paper is to examine cash dividends and stock repurchases in Canada from 1988 to 2006 and their relationship with earnings.

Design/methodology/approach

The study uses logistic regressions to examine the likelihood of paying dividends and the timing of repurchases and OLS regressions to examine the level of payout.

Findings

The fraction of dividend‐paying firms declines from 1988 to 2001 and then slightly rebounds until the end of the sample period in 2006. Firm size, profitability, investment opportunities, and catering incentives explain the likelihood of paying dividends. Unlike US firms, Canadian repurchase‐only firms do not become important payers in terms of either the percentage of firms or the level of payout. Dividend‐only firms pay out significant amounts of cash. Firms with both regular dividends and regular repurchases pay out the largest amount. The payout of different groups of payers is determined by their earnings. Testing firms with both regular dividends and regular repurchases reveals that earnings, undervaluation, and availability of cash explains the timing of repurchases but earnings mainly explains the level of repurchases.

Research limitations/implications

Canadian data are unavailable after 2006, which precludes investigating the potential implications of the financial crisis beginning in 2007.

Originality/value

This is the first paper to analyze the evolution of the relationship between payout and earnings in Canada.

Details

International Journal of Managerial Finance, vol. 9 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

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