Can the Information Content of Share Repurchases Improve the Accuracy of Equity Premium Predictions?

Abstract

We adjust the dividend-price ratio for share repurchases and investigate whether predictive power can be improved when constructing forecasts of UK and French equity premia. Regulations in the two largest European stock markets allow us to employ actual repurchase data in our predictive regressions. Hence, we are able to overcome problems associated with markets characterised by less stringent disclosure requirements, where investors might have to rely on proxies for measuring repurchase activity. We find that predictability does not improve either in a statistical or in an economically significant sense once actual share repurchases are considered. Furthermore, we employ a proxy measure of repurchases which can be easily constructed in international markets and demonstrate that its predictive content is not in line with that of the actual repurchase data.

Keywords: Stock Return Predictability, Equity premium, Dividend-price ratio, Share Repurchases, Out-of-sample tests

JEL Classification: C22, C53, G12, G17