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: Suggested Citation