Mimicking Repurchases

50 Pages Posted: 26 Feb 2005

Date Written: February 26, 2005


We study the tendency of firms to mimic the repurchase announcements of their industry counterparts. We argue that a firm, by repurchasing its shares, sends a positive signal about itself and a negative one about its competitors. This induces the competing firms to mimic the behavior of the repurchasing firm by repurchasing themselves. By using a broad sample of U.S. firms for the period 1984 to 2002, we show that in concentrated industries, a repurchase announcement lowers the stock price of the other firms in the same industry. The other firms then retaliate by repurchasing themselves in order to undo these negative effects. When repurchases do occur, they are chosen mostly as a strategic reaction to other firms' initiating repurchases and are not motivated by the desire to time the market, i.e. to take advantage of a significantly undervalued stock price. We show that repurchasing firms in more concentrated industries, therefore, experience a lower increase in value in comparison to their less concentrated counterparts in the post-announcement era. Alternative methodologies used to estimate long-term performance confirm that it is only the low concentration firms that outperform the market, their non-repurchasing peers and their more concentrated counterparts by amounts that are economically and statistically significant.

Keywords: Payout policy, repurchases, product market competition, signaling

JEL Classification: G35, G32

Suggested Citation

Massa, Massimo and Rehman, Zahid and Vermaelen, Theo, Mimicking Repurchases (February 26, 2005). Available at SSRN: https://ssrn.com/abstract=674501 or http://dx.doi.org/10.2139/ssrn.674501

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Zahid Rehman

BlackRock ( email )

Murray House
1 Royal Mint Court
London, EC3N 4HH
United Kingdom

Theo Vermaelen

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
33 1 60 72 42 63 (Phone)
33 1 60 72 40 45 (Fax)

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