Is the Market Underreacting or Overreacting to Open Market Share Repurchases? A UK Perspective

Abstract:     
Using UK open market repurchases, we reject the market underreaction hypothesis and the market overreaction hypothesis proposed by (Ikenberry, Lakonishok and Vermaelen 1995) and (Peyer and Vermaelen 2009), respectively. The evidence supports that the UK market reacts slowly to actual repurchases made by value firms. UK repurchases on average do not suffer from share undervaluation prior to the announcement. Value firms perform just as well as glamour firms during the authorisation period but outperform glamour firms significantly two years following the announcement. It turns out that value firms repurchase over 6% more shares than glamour firms during the authorisation period.

Keywords: Open Market Share Repurchases, Market Underreaction or Overreaction, Long Run Abnormal Returns

JEL Classification: G14, G35

working papers series