The Nature and Persistence of Buyback Anomalies

Abstract:     
Using recent data on buybacks, we reject the hypothesis that the buyback anomalies first reported by Lakonishok and Vermaelen (1990) and Ikenberry, Lakonishok, and Vermaelen (1995) have disappeared over time. Long-term positive excess returns after open market repurchase programs are negatively correlated with abnormal returns during the six months prior to the buyback announcement. This is consistent with the hypothesis that the buyback is a response to a market overreaction to bad news. We find one such piece of bad news: significant analyst downgrades, combined with overly pessimistic forecasts of long-term earnings. Stock prices after tender offers are set as if all investors tender their shares, but empirically they don't. Thus, the arbitrage opportunity persists because the market sets prices as if the average investor, not the marginal investor determines the stock price.

Keywords: Share repurchase, market efficiency

JEL Classification: G14, G35

working papers series