What do Market Participants Learn from Share Repurchases? Evidence from a Return Decomposition

52 Pages Posted: 26 Jul 2021 Last revised: 6 Jun 2023

See all articles by Philip Valta

Philip Valta

University of Bern

Sascha Jakob

University of Bern

Date Written: May 28, 2023

Abstract

This paper analyzes cash flow and cost of capital dynamics around share repurchase announcements of publicly traded US firms by decomposing stock returns into news related to cash flows and discount rates. After repurchase announcements, the cost of capital decreases significantly, while cash flows do not change. The decrease in the cost of capital is largest for firms that appear underpriced. These firms also experience the highest long-term returns after repurchase announcements. The findings suggest that market participants learn about a temporary overestimation of the cost of capital when firms announce share repurchases.

Keywords: Share repurchases, Return Decomposition, Cost of Capital, Buyback Anomaly

JEL Classification: G14, G32, G35

Suggested Citation

Valta, Philip and Jakob, Sascha, What do Market Participants Learn from Share Repurchases? Evidence from a Return Decomposition (May 28, 2023). Available at SSRN: https://ssrn.com/abstract=3892063 or http://dx.doi.org/10.2139/ssrn.3892063

Philip Valta (Contact Author)

University of Bern ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

HOME PAGE: http://https://www.ifm.unibe.ch/about_us/people/prof_dr_valta_philip/

Sascha Jakob

University of Bern ( email )

Engehaldenstrasse 4
Bern, BERN 3012
Switzerland

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