Share Repurchase Reasons and the Market Reaction to Actual Share Repurchases: Evidence from Australia

Abstract

Using repurchase reasons provided by Australian companies for their stock repurchase programs, we ask if the market's response is different across repurchase motivations by examining actual daily share repurchases. We find that firms with the undervaluation motive experience a more positive stock price reaction when they report their repurchases to the market. We show that undervaluation motive firms repurchase fewer shares and have a lower program completion rate than other motives firms. During the 1‐year period following the repurchases, undervaluation motive firms do better than their control sample firms whereas other motive firms do not perform better or worse than their control sample firms. Overall, our results suggest that the undervaluation motive is a stronger signal than other repurchase motives, and contrary to the predictions of the standard signaling theories, management statements carry some value for the market. We also present some evidence suggesting that a costly action may not be needed for a signal to be credible.

Market Reaction to Actual Daily Share Repurchases in Greece

“…Using the full set of announcements, we find that companies engage in buybacks when the stock price exhibits a declining trend, and that the short-term market reaction is not statistically significant, a result that is consistent with the price support hypothesis (Cook et al, 2004, Ginglinger and Hamon, 2007, Akyol and Foo, 2013, Zhang, 2005.…”

“…Note that the result is different from Akyol and Foo (2013) and Zhang (2005) who do not find significant long-term abnormal returns for repurchasing firms.…”

“…The paper contributes further evidence to the literature on actual share repurchases in non-USA (2007); and Akyol and Foo (2013).…”

“…Akyol and Foo (2013) use daily data from Australia and conclude that for companies which announce as a reason for initiating an SRP the fact that the stock is underpriced, the investors reaction is positive and stronger compared to the companies that announce a different reason for SRP approval. This observation holds both for the announcement date of the SRPs and for the dates of the actual repurchases.…”

“…Studies that use daily data find, among other things, that the companies buy their own shares when the share prices are on a declining path, that the managers are capable to time the markets, and that firms acquire their shares at a price lower than the average investor does (Brockman and Chung, 2001, Zhang, 2005, McNally et al, 2006, Akyol and Foo, 2013). …”