Do Corporate Managers Know When Their Shares are Undervalued? New Evidence Based on Actual (and Not Just Announced) Stock Buybacks

15 Pages Posted: 20 Jan 2017

See all articles by Amy K. Dittmar

Amy K. Dittmar

University of Michigan at Ann Arbor - The Stephen M. Ross School of Business

Laura Casares Field

University of Delaware - Alfred Lerner College of Business and Economics

Date Written: Fall 2016

Abstract

This article summarizes the findings of the authors' recent study, published in the Journal of Financial Economics, of whether public companies are able to repurchase their own shares at a discount to the market, thereby earning more than a market return on such “investments.” To the extent the answer is yes, it would suggest that management has an advantage in assessing the intrinsic value of the companies they manage. Using as their sample all 2,237 publicly traded U.S. companies that repurchased their own stock between 2004 and 2011, the authors compared the average price paid during the month to the average price at which the firm's shares traded during that month as well as three and six months after the repurchase. (All earlier studies had measured stock performance from the date of the repurchase announcements rather than from the date of the actual repurchases.) The authors' conclusion, which may come as more of a surprise to financial economists than practicing corporate executives, was that the majority of companies repurchasing their shares have in fact earned a positive return on their investment in their own stock. Perhaps the most important finding of the study, however, was that infrequent repurchasers — defined as companies that bought back their own stock four or fewer times a year — have been much more successful in buying undervalued shares than regular repurchasers. For example, when evaluated over a six‐month holding period, the annual “alpha” of infrequent repurchasers was 2.4% greater than that of frequent repurchasers — those that bought back their shares at least nine times a year. And this advantage was even more significant for companies that repurchased just once during the year — a group that recorded an alpha of 5.9%, as compared to 1.5% for monthly repurchasers. Moreover, the results were essentially the same when extended over considerably longer holding periods. For the entire sample of companies that repurchased their shares, the authors reported finding positive and significant alphas of 0.3% per month over windows ranging from three months to three years after the repurchase. But, as reported above, the infrequent repurchasers significantly outperformed frequent repurchasers over all time horizons, with differences in alpha that ranged from a low of 0.3% and to as high as 0.6% per month.

Suggested Citation

Dittmar, Amy and Field, Laura Casares, Do Corporate Managers Know When Their Shares are Undervalued? New Evidence Based on Actual (and Not Just Announced) Stock Buybacks (Fall 2016). Journal of Applied Corporate Finance, Vol. 28, Issue 4, pp. 73-85, 2016. Available at SSRN: https://ssrn.com/abstract=2902369 or http://dx.doi.org/10.1111/jacf.12205

Amy Dittmar (Contact Author)

University of Michigan at Ann Arbor - The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-3108 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/adittmar/

Laura Casares Field

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States
302-831-3810 (Phone)

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