What Drives the Declining Wealth Effect of Subsequent Share Repurchase Announcements?

Abstract

Recent academic studies document that open market share repurchase announcements in the United States generate significantly lower returns than those reported in earlier studies. We find that the lower announcement return is associated with an increasing number of subsequent announcements in the more recent periods. Although the announcement period return from the initial announcement is positive, subsequent announcement returns are significantly decreasing. Further, we find that the decreasing returns of subsequent announcements are attributed to firms with negative past repurchase announcement returns. Our multivariate regression test results are consistent with the notion that the decreasing subsequent repurchase announcement returns are driven by hubris-endowed managers.

Corporate Finance

“…In addition, a different way to pay cash to investors is through a share repurchase or buyback (Berk and DeMarzo 2017), the frequent method being open market share repurchase whose approval is granted by the board of directors or subsequent to a shareholders meeting (Vermaelen 2005). The paper of Ding et al (2020) documented for the case of the United States that, compared with companies which do not repeat share repurchase announcements, corporations that reiterate their share repurchase programs register higher growth opportunities, have more free cash flows, are more profitable, less undervalued, larger, and show significantly lower cumulative abnormal announcement period returns.…”