Can the Open Market React to Stock Repurchases Announcement Correctly?

The International Journal of Business and Finance Research, v. 13 (1) p. 31-52, 2019

22 Pages Posted: 23 Mar 2019

See all articles by Chun An Li

Chun An Li

National Yunlin University of Science and Technology

Tse-Mao Lin

National Yunlin University of Science and Technology

Ching-Han Chuang

National Yunlin University of Science and Technology

Date Written: 2019

Abstract

In this study, we explore the market reaction to the announcement of stock repurchase plans, and the mutual influence between the actual fulfillment rate of stock repurchase plans and the degree of earnings management. From the perspective of earnings management behavior, this paper also analyzes the actual fulfillment rate, and discusses the information asymmetry, firms may carry out earnings management before stock repurchases, to mislead the investors into believing the prettified financial statements, to induce the investors to invest, and convey false signals to the market. The empirical results demonstrate that the cumulative abnormal return (CAR) resulting from true signals is higher than that resulting from false signals. Further, the phenomenon is more significant in the hi-tech industry than in traditional industries, and the firms with Purpose 3 (support the stock prices to maintain firm credit and shareholders' equity), a significant, positive abnormal return is observed on the day before and the day after the announcement day. In bullish periods, abnormal returns are not significant; in bearish periods, a significant, positive abnormal return is observed. These findings are applicable not only to the research samples but also to the samples when the extreme values are removed. Therefore, the empirical results are still robust.

Keywords: Stock Repurchases, Abnormal Returns, Earnings Management

JEL Classification: G32, G34, G41

Suggested Citation

Li, Chun An and Lin, Tse-Mao and Chuang, Ching-Han, Can the Open Market React to Stock Repurchases Announcement Correctly? (2019). The International Journal of Business and Finance Research, v. 13 (1) p. 31-52, 2019, Available at SSRN: https://ssrn.com/abstract=3340157

Chun An Li (Contact Author)

National Yunlin University of Science and Technology ( email )

123, University Rd. Sec 3
Touliu, Youlin 640, Yunlin 64002
Taiwan

Tse-Mao Lin

National Yunlin University of Science and Technology ( email )

123, University Rd. Sec 3
Touliu, Youlin 640, Yunlin 64002
Taiwan

Ching-Han Chuang

National Yunlin University of Science and Technology ( email )

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