Motives for Multiple Open-Market Repurchase Programs

Abstract

This paper examines the differences in motives, firm characteristics, market performance and subsequent operating performance of firms that repurchase shares frequently versus firms that repurchase only occasionally or infrequently. With the growing popularity of open market repurchase programs it has become relatively common for firms to repurchase shares on a regular or frequent basis. Frequent repurchases appear to be motivated by a different rationale from more infrequent repurchases. Frequent repurchasers are much larger, have significantly less variation in operating income and higher dividend payout ratios. Infrequent repurchases are made by smaller firms with potentially high degrees of asymmetric information. The firms that repurchase infrequently have more volatile operating income, significantly lower institutional ownership and significantly higher managerial ownership. Further, infrequent repurchasers have lower market-to-book ratios suggesting that they are more likely to be undervalued. The market reactions to the repurchase announcements are consistent with these ideas. Although on average all repurchases appear to be viewed favorably by the market, infrequent repurchases are greeted with a much stronger positive reaction. Infrequent repurchases are preceded by negative abnormal returns suggesting that undervaluation, or a depressed stock price, may indeed motivate these repurchases, while frequent repurchases are preceded by relatively normal rates of return. Not only do we find no evidence of improved operating performance following frequent repurchase announcements, but we also find no evidence of improved operating performance for the less frequent repurchases.

Keywords: payout policy, repurchase, signaling

JEL Classification: G32, G35