The Intra-Industry Effects of Open Market Share Repurchases: Contagion or Competitive?
Posted: 30 Aug 1998
We examine the extent to which announcements of open market share repurchase programs affect the valuation of competing firms in the same industry. On average, although firms announcing open market share repurchase programs experience a significantly positive stock price reaction at announcement, portfolios of rival firms in the same industry experience a significant and contemporaneous negative stock price reaction. This suggests that perceived changes in the competitive positions of the repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Thus, the competitive intra-industry effects of open market repurchases outweigh any contagion effects. In addition, cross-sectional tests indicate that these competitive effects are more pronounced in industries characterized by a lower degree of competition and the less correlated the stock returns of the repurchasing firm and its rivals.
JEL Classification: G31, G32, G34
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