Motives for Multiple Open-Market Repurchase Programs

31 Pages Posted: 2 Sep 2001

See all articles by Murali Jagannathan

Murali Jagannathan

SUNY at Binghamton - School of Management

Clifford P. Stephens

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2001

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

Suggested Citation

Jagannathan, Murali and Stephens, Clifford P., Motives for Multiple Open-Market Repurchase Programs (May 21, 2001). Available at SSRN: https://ssrn.com/abstract=281569 or http://dx.doi.org/10.2139/ssrn.281569

Murali Jagannathan

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-4639 (Phone)

Clifford P. Stephens (Contact Author)

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
2159 CEBA
Baton Rouge, LA 70803-6308
United States
225-578-6334 (Phone)

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