Working Paper: NBER ID: w7325
Authors: David Ikenberry; Josef Lakonishok; Theo Vermaelen
Abstract: During the 1980s, U.S. firms that announced stock repurchase programs earned favorable long-run returns. Recently, concerns have been raised regarding the robustness of these findings. This comes at a time of explosive worldwide growth in the adoption of repurchase programs. This study provides out-of-sample evidence for 1,060 Canadian repurchase programs announced between 1989 and 1997. As in the U.S., the Canadian stock market seems to discount the information contained in repurchase announcements. Value stocks announcing repurchase programs have particularly favorable returns. Canadian law requires companies to report how many shares they repurchase on a monthly basis. We find that managers are sensitive to mispricing as completion rates are higher in cases where undervaluation may be a more important factor. Moreover, trades are linked to price movements; managers buy more shares when prices fall and reduce their buying when prices rise.
Keywords: stock repurchases; Canada; performance; strategic trading
JEL Codes: G14; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| undervaluation (D46) | repurchase activity (G34) |
| price movements (E30) | repurchase activity (G34) |
| falling prices (E31) | increase in repurchase activity (G34) |
| rising prices (P22) | decrease in repurchase activity (G34) |
| completion rates of repurchase programs (G34) | undervaluation (D46) |
| abnormal returns (G14) | repurchase announcements (G34) |
| negative abnormal returns (G12) | repurchase announcements (G34) |
| value stocks (G12) | higher abnormal returns (G17) |
| growth stocks (G31) | lower abnormal returns (G12) |
| market mispricing (G19) | managerial behavior (D22) |