What do Market Participants Learn from Share Repurchases? Evidence from a Return Decomposition
57 Pages Posted: 26 Jul 2021 Last revised: 11 Apr 2022
Date Written: April 11, 2022
This paper analyzes cash flow and discount rate dynamics around share repurchase announcements of publicly traded US firms by decomposing stock returns into news related to cash flows and news related to discount rates. After repurchase announcements, discount rates decrease significantly, while cash flows do not change. The decrease in discount rates is largest for firms that are likely to be underpriced. This pattern in the data is consistent with the cross-sectional variation in long-term returns after repurchase announcements. The findings suggest that market participants learn about a temporary overestimation of firms' discount rates when firms announce share repurchases.
Keywords: Share repurchases, Buyback Anomaly, Return Decomposition, Systematic Risk
JEL Classification: G14, G32, G35
Suggested Citation: Suggested Citation