Share Buybacks and Abnormal Returns

Abstract

We examine the behavior of stock returns after share buyback announcements. In line with the existing literature, we find evidence of abnormal returns after buyback announcements. A market neutral portfolio that is long equally weighted (with daily rebalancing) all companies that announced within the most recent month and short the IWM ETF/market using a rolling β estimated from the recent 250 days has average annual "abnormal" returns of 11.6% with a Sharpe ratio of 1.3 over the period from 2000-01-20 to 2014-12-31. Moreover, small value-stocks that under performed pre buyback announcement date outperform large growth-stocks that over performed pre buyback announcement date. A portfolio of the first type of companies, in which we hold stocks for one month after buyback announcement, shows annual "abnormal" returns relative to the IWM market index of 16.3% with a Sharpe ratio of 0.8 over the same period. A portfolio of the second type of companies has returns and a Sharpe ratio of 7.6% and 0.4, respectively, over the same period. Finally, we provide evidence that buybacks could potentially provide a signal for timing/predicting the overall market.

Keywords: Abnormal Returns, Market Timing, Share Buybacks, Hedge Funds, Market Efficiency, Share Repurchase