Can Price Movement Toward Equilibrium Overshoot? Evidence from Share Repurchases and Subsidiary Selling
C. Edward Wang
National Taipei University - Department of Business Administration
Ramon P. DeGennaro
University of Tennessee, Knoxville - Department of Finance
December 20, 2010
If a firm repurchases its own shares to signal that they are undervalued then the stock price should increase to its intrinsic level. However, it is not clear whether the price should monotonically increase to its intrinsic level or instead could reach equilibrium through a more dynamic process by which the price fluctuates around the intrinsic level and approaches that level gradually. Using unique data from the Taiwanese stock market, which allows firms to buy and sell their own shares through subsidiaries, we find strong evidence supporting the view that a price rebound does overshoot for at least some firms and the stock becomes overvalued after a repurchase announcement. Our work complements the literature regarding both seasoned equity offerings and share repurchases. Our study supports the view of Daniel, Hirshleifer, and Subrahmanyam (1998) that intermediate-term price drift is caused by investor overconfidence, which then results in market overreaction.
Number of Pages in PDF File: 46
Keywords: Open-Market Repurchases, Market Underreaction, Market Overreaction
JEL Classification: G14, G15, G35working papers series
Date posted: August 23, 2010 ; Last revised: December 16, 2010
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