Contrarian Investment, New Share Issues and Repurchases

Abstract:     
This paper examines the returns to investment strategies based on the interactions between value-to-market indicators and corporate financing transactions that increase or decrease the firm's outstanding equity, i.e., equity issues and repurchases. Portfolio-level analyses and firm-level cross-sectional regressions indicate that the well-documented contrarian profits soar when value stocks which repurchase shares (value repurchasers) and growth stocks which issue shares (growth issuers) are considered. The results also show that value-to-market ratios cannot capture the cross-sectional variation in expected stock returns when value issuers and growth repurchasers are considered. Based on various risk measures, we find that value repurchasers are not riskier than growth issuers. Furthermore, value repurchasers (growth issuers) experience the highest increase (decrease) in future growth rates. Our findings are consistent with the misvaluation explanation for the superior returns of value stocks.

Keywords: Share issues, share repurchases, contrarian investment, expected stock returns, value-to-market ratios

JEL Classifications: G10, G30, G11, G12, G14

Working Paper Series