Can Price Movement Toward Equilibrium Overshoot? Evidence from Share Repurchases and Subsidiary Selling

46 Pages Posted: 23 Aug 2010 Last revised: 28 Feb 2019

See all articles by C. Edward Wang

C. Edward Wang

National Taipei University - Department of Business Administration

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

Date Written: December 20, 2010

Abstract

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.

Keywords: Open-Market Repurchases, Market Underreaction, Market Overreaction

JEL Classification: G14, G15, G35

Suggested Citation

Wang, C. Edward and DeGennaro, Ramon P., Can Price Movement Toward Equilibrium Overshoot? Evidence from Share Repurchases and Subsidiary Selling (December 20, 2010). Available at SSRN: https://ssrn.com/abstract=1663374 or http://dx.doi.org/10.2139/ssrn.1663374

C. Edward Wang (Contact Author)

National Taipei University - Department of Business Administration ( email )

No. 69, Sec. 2, Chien Kuo N. Rd.
Taipei, Taiwan 104
Taiwan

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

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