What do Market Participants Learn from Share Repurchases? Evidence from a Return Decomposition
52 Pages Posted: 26 Jul 2021 Last revised: 6 Jun 2023
Date Written: May 28, 2023
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: Suggested Citation