Contrarian Investment, New Share Issues and Repurchases

43 Pages Posted: 15 Oct 2006 Last revised: 27 Feb 2012

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

K. Ozgur Demirtas

Sabanci University Graduate School of Management

Armen Hovakimian

Baruch College - Zicklin School of Business

Abstract

This paper examines the returns to investment strategies based on the interactions between value-to-market indicators and corporate financing transactions that increase or decrease the firm's outstanding equity, i.e., equity issues and repurchases. Portfolio-level analyses and firm-level cross-sectional regressions indicate that the well-documented contrarian profits soar when value stocks which repurchase shares (value repurchasers) and growth stocks which issue shares (growth issuers) are considered. The results also show that value-to-market ratios cannot capture the cross-sectional variation in expected stock returns when value issuers and growth repurchasers are considered. Based on various risk measures, we find that value repurchasers are not riskier than growth issuers. Furthermore, value repurchasers (growth issuers) experience the highest increase (decrease) in future growth rates. Our findings are consistent with the misvaluation explanation for the superior returns of value stocks.

Keywords: Share issues, share repurchases, contrarian investment, expected stock returns, value-to-market ratios

JEL Classification: G10, G30, G11, G12, G14

Suggested Citation

Bali, Turan G. and Demirtas, K. Ozgur and Hovakimian, Armen, Contrarian Investment, New Share Issues and Repurchases. Available at SSRN: https://ssrn.com/abstract=934782 or http://dx.doi.org/10.2139/ssrn.934782

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

K. Ozgur Demirtas (Contact Author)

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

Armen Hovakimian

Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty-profile/armen-hovakimian/

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