The Information Content of Share Repurchase Programs

44 Pages Posted: 30 Mar 2000

See all articles by Gustavo Grullon

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Date Written: November 2002

Abstract

Contrary to the implications of many payout theories, we find that announcements of open-market share repurchase programs are not followed by an increase in operating performance. However, we find that the systematic risk and the cost of capital of these firms decline after these events. Further, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Taken together, our results suggest that the market reacts positively to share repurchase announcements because these events are associated with a reduction in the agency costs of free cash flows and with a reduction in the firm's cost of capital. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in systematic risk.

JEL Classification: G35

Suggested Citation

Grullon, Gustavo and Michaely, Roni, The Information Content of Share Repurchase Programs (November 2002). Available at SSRN: https://ssrn.com/abstract=206328 or http://dx.doi.org/10.2139/ssrn.206328

Gustavo Grullon (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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