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The Nature and Persistence of Buyback Anomalies

78 Pages Posted: 19 Mar 2005 Last revised: 2 Feb 2009

Urs Peyer

INSEAD - Finance

Theo Vermaelen

INSEAD - Finance

Abstract

Using recent data on buybacks, we reject the hypothesis that the buyback anomalies first reported by Lakonishok and Vermaelen (1990) and Ikenberry, Lakonishok, and Vermaelen (1995) have disappeared over time. Long-term positive excess returns after open market repurchase programs are negatively correlated with abnormal returns during the six months prior to the buyback announcement. This is consistent with the hypothesis that the buyback is a response to a market overreaction to bad news. We find one such piece of bad news: significant analyst downgrades, combined with overly pessimistic forecasts of long-term earnings. Stock prices after tender offers are set as if all investors tender their shares, but empirically they don't. Thus, the arbitrage opportunity persists because the market sets prices as if the average investor, not the marginal investor determines the stock price.

Keywords: Share repurchase, market efficiency

JEL Classification: G14, G35

Suggested Citation

Peyer, Urs and Vermaelen, Theo, The Nature and Persistence of Buyback Anomalies. Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=687289 or http://dx.doi.org/10.2139/ssrn.687289

Urs C. Peyer

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4178 (Phone)
+33 1 6072 4045 (Fax)

Theo Vermaelen (Contact Author)

INSEAD - Finance ( email )

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

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