Market Underreaction to Open Market Share Repurchases

Abstract

We examine the long-run performance of 1,239 open market share repurchases announced during the period 1980 to 1990. We find that the average excess four-year buy-and-hold return measured after the initial announcement is 12.6 percent. For "value" stocks, companies that are more likely to be making repurchases because of undervaluation, the average excess return is 45 percent. Thus undervaluation appears to be an important motive for repurchasing shares. Furthermore, the market systematically errs in its initial response and ignores much of the signal conveyed through repurchases.

JEL Classification: G3, G31