Determinants of share returns following repurchase announcements in China

  • Received February 18, 2017;
    Accepted March 29, 2017;
    Published May 31, 2017
  • Author(s)
    Christopher Gan
    ORCID , Chao Bian , Damon Wu , David A. Cohen
  • DOI
    http://dx.doi.org/10.21511/imfi.14(2).2017.01
  • Article Info
    Volume 14 2017, Issue #2, pp. 4-18
  • TO CITE АНОТАЦІЯ
  • Cited by
    7 articles
  • 1219 Views
  • 1014 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

By combining the market model with the three-factor model, this study investigates firms’ share returns after the announcement of share repurchase. Employing data for China’s A-share market, this study’s sample utilizes 417 share repurchase announcements over the period of 2000 to 2012. Empirical results show that firms with higher sales growth rates are more likely to send a positive signal to the market through their share repurchase efforts. Analysis also shows that the higher a firm’s price-to-earnings ratio (utilized as a measure of overvaluation), the lower the firm’s cumulative abnormal returns. These results imply that Chinese share markets put more emphasis on the firm’s future growth and share overvaluation.

view full abstract hide full abstract
    • Figure 1. Frequencies of share repurchase announcements (2000-2012)
    • Figure 2. Average cumulative abnormal returns (with event window (-20, 20))
    • Table 1. Variable definitions (for equation (5))
    • Table 2. Summary for share repurchases in Chinese share markets (2000-2012)
    • Table 3. Descriptive statistics during the event window (-20, 20)
    • Table 4. Break-down of cumulative abnormal returns
    • Table 5. Estimated results of multi-factor model (equation (5))
    • Allen, F., Qian, J., & Qian, M. (2005). Law, finance, and economic growth in China. Journal of Financial Economics, 77(1), 57-116.
    • Andriosopoulos, D. & Hoque, H. (2013). The determinants of share repurchases in Europe. International Review of Financial Analysis, 27, 65-76.
    • Asquith, P., Bruner, R. F., & Mullins, D. W. (1983). The gains to bidding firms from merger. Journal of Financial Economics, 11(1), 121-139.
    • Bagnoli, M., & Lipman, B. L. (1989). Provision of public goods: Fully implementing the core through private contributions. The Review of Economic Studies, 56(4), 583-601.
    • Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 3-18.
    • Bens, D. A., Nagar, V., & Wong, M. H. (2002). Real investment implications of employee stock option exercises. Journal of Accounting Research, 40(2), 359-393.
    • Beaver, W. H. (1968). The information content of annual earnings announcements. Journal of Accounting Research, 67-92.
    • Billett, M. T., & Xue, H. (2007). The takeover deterrent effect of open market share repurchases. The Journal of Finance, 62(4), 1827-1850.
    • Binder, J. (1998). The event study methodology since 1969. Review of Quantitative Finance and Accounting, 11(2), 111-137.
    • Born, P., Giaccotto, C. & Ritsatos, T. (2004). The wealth and information effects of insurers’ open market stock repurchase announcements. Risk Management and Insurance Review, 7(1), 25-40.
    • Bortolotti, B., Cambini, C., Rondi, L., & Spiegel, Y. (2011). Capital structure and regulation: do ownership and regulatory independence matter? Journal of Economics & Management Strategy, 20(2), 517-564.
    • Boycko, M., Shleifer, A., & Vishny, R. W. (1996). A theory of privatisation. The Economic Journal, 106(435), 309-319.
    • Brickley, J. A., Linck, J. S., & Coles, J. L. (1999). What happens to CEOs after they retire? New evidence on career concerns, horizon problems, and CEO incentives. Journal of Financial Economics, 52(3), 341-377.
    • Brockman, P., & Chung, D. Y. (2001). Managerial timing and corporate liquidity: evidence from actual share repurchases. Journal of Financial Economics, 61(3), 417-448.
    • Chakravarty, S., Sarkar, A., & Wu, L. (1998). Information asymmetry, market segmentation and the pricing of cross-listed shares: theory and evidence from Chinese A and B shares. Journal of International Financial Markets, Institutions and Money, 8(3), 325-356.
    • Chan, K., Ikenberry, D., & Lee, I. (2004). Economic sources of gain in stock repurchases. Journal of Financial and Quantitative Analysis, 39(03), 461-479.
    • Chan, K., Ikenberry, D. L., & Lee, I. (2007). Do managers time the market? Evidence from open-market share repurchases. Journal of Banking & Finance, 31(9), 2673-2694.
    • Chen, S., Sun, Z., Tang, S., & Wu, D. (2011). Government intervention and investment efficiency: Evidence from China. Journal of Corporate Finance, 17(2), 259-271.
    • Chen, F. (2013). Capital market reaction to share repurchase announcements: An empirical test on Shanghai Stock Exchange (SSE), Master of Finance Thesis, St. Mary’s University, Halifax, N.S., Canada.
    • Choi, D. (1997). Targeted Share Repurchases, Free Cash Flows, and Shareholder Wealth: Additional Evidence. Managerial Finance, 23(3), 49-63.
    • Cook, D. O., Krigman, L., & Leach, J. C. (2004). On the timing and execution of open market repurchases. Review of Financial Studies, 17(2), 463-498.
    • CSRC. (2005). Consultation Paper of the CSRC for the Provisional Administrative Measures on Public Share Repurchase by Listed Companies (Exposure Draft).
    • DeFusco, R. A., Johnson, R. R., & Zorn, T. S. (1990). The effect of executive stock option plans on stockholders and bondholders. Journal of Finance, 617-627.
    • Dey. S., & Nair, S.R. (2013). Stat-level borrowing costs under deregulation-an Indian experience, Journal of Asia Business Studies, 7(1), 68-83.
    • Dittmar, A. K. (2000). Why do firms repurchase stock? The Journal of Business, 73(3), 331-355.
    • Dobbs, R. & Rehm, W. (2005). The value of share buybacks. McKinsey Quarterly, August, 54.
    • Evans, J. P. & Evans, R. T. (2001). Accounting performance of firms pursuing a share repurchase strategy. Asian Review of Accounting, 9(2), 56-74.
    • Fama, E. F., Fisher, L., Jensen, M. C., & Roll, R. (1969). The adjustment of stock prices to new information. International Economic Review, 10(1), 1-21.
    • Fama, E. F. (1998). Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics, 49(3), 283-306.
    • Fama, E. F. & French, K. R. (1992). The cross‐section of expected stock returns. The Journal of Finance, 47(2), 427-465.
    • Fenn, G. W. & Liang, N. (2001). Corporate payout policy and managerial stock incentives. Journal of Financial Economics, 60(1), 45-72.
    • Fernald, J. & Rogers, J. H. (1998). Puzzles in the Chinese stock market. Board of Governors of the Federal Reserve System. International Finance Discussion Papers, (619).
    • Flannery, M. J. & Hankins, K. W. (2013). Estimating dynamic panel models in corporate finance. Journal of Corporate Finance, 19, 1-19.
    • Gerschenkron, A. (1962). Economic backwardness in historical perspective. A book of essays, Cambridge, Massachusetts: Belknap Press of Harvard University Press.
    • Ginglinger, E. & L’Her, J. F. (2006). Ownership structure and open market stock repurchases in France. European Journal of Finance, 12(1), 77-94.
    • Gong, L. (2013). Empirical study on the relationship between stock repurchase and stock return of Chinese companies listed in China mailand, Hong Kong, and the US. Unpublished paper.
    • Grullon, G. & Ikenberry, D. L. (2000). What do we know about stock repurchases? Journal of Applied Corporate Finance, 13(1), 31-51.
    • Grullon, G. & Michaely, R. (2004). The information content of share repurchase programs. The Journal of Finance, 59(2), 651-680.
    • Hatakeda, T. & Isagawa, N. (2004). Stock price behavior surrounding stock repurchase announcements: Evidence from Japan. Pacific- Basin Finance Journal, 12(3), 271-290.
    • Ho, L. C. J., Liu, C. S., & Ramanan, R. (1997). Open- Market Stock Repurchase Announcements and Revaluation of Prior Accounting Information (Digest Summary). Accounting Review, 72(3), 475-87.
    • Hribar, P., Jenkins, N. T., & Johnson, W. B. (2006). Stock repurchases as an earnings management device. Journal of Accounting and Economics, 41(1), 3-27.
    • Huang, J. J., Shen, Y., & Sun, Q. (2011). Nonnegotiable shares, controlling shareholders, and dividend payments in China. Journal of Corporate Finance, 17(1), 122-133.
    • Ikenberry, D., Lakonishok, J., & Vermaelen, T. (1995). Market underreaction to open market share repurchases. Journal of Financial Economics, 39(2), 181-208.
    • Ikenberry, D. L. & Vermaelen, T. (1996). The option to repurchase stock. Financial Management, 25(4), 9-24.
    • Jaffe, J. F. (1974). Special information and insider trading. The Journal of Business, 47(3), 410-428.
    • Jagannathan, M. & Stephens, C. (2003). Motives for multiple open-market repurchase programs. Financial Management, 71-91.
    • Lamba, A. S. & Luan, I. (2004). The Long-Run Operating Performance of On-MarketShare Buyback.
    • Louis, H. & White, H. (2007). Do managers intentionally use repurchase tender offers to signal private information? Evidence from firm financial reporting behavior. Journal of Financial Economics, 85(1), 205-233.
    • Li, K. & McNally, W. (2007). The information content of Canadian open market repurchase announcements. Managerial Finance, 33(1), 65-80.
    • Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics, 13-37.
    • Mitchell, J. D., Dharmawan, G. V., & Clarke, A. W. (2001). Managements’ views on share buy‐backs: an Australian survey. Accounting & Finance, 41(1‐2), 93-129.
    • Nohel, T. & Tarhan, V. (1998a). Share repurchases and firm performance: new evidence on the agency costs of free cash flow. Journal of Financial Economics, 49(2), 187-222.
    • Oded, J. (2005). Why do firms announce open-market repurchase programs? Review of Financial Studies, 18(1), 271-300.
    • Padgett, C. & Wang, Z. (2007). Short-term returns of UK share buyback activity. ICMA Centre Discussion Papers in Finance DP 2007-10.
    • Park, Y. & Jung, K. (2005). Stock repurchase in Korea: market reactions and operating performance. Review of Pacific Basin Financial Markets and Policies, 8(01), 81-112.
    • Peyer, U. & Vermaelen, T. (2009). The nature and persistence of buyback anomalies. Review of Financial Studies, 22(4), 1693-1745.
    • Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
    • Shleifer, A. & Vishny, R. W. (2002). The grabbing hand: Government pathologies and their cures. Harvard University Press, Cambridge, Massachusetts.
    • Skinner, D. J. (2008). The evolving relation between earnings, dividends, and stock repurchases. Journal of Financial Economics, 87(3), 582-609.
    • Stephens, C. P. & Weisbach, M. S. (1998). Actual share reacquisitions in open‐market repurchase programs. The Journal of Finance, 53(1), 313-333.
    • Sun, Q. & Tong, W. H. (2003). China share issue privatization: the extent of its success. Journal of Financial Economics, 70(2), 183-222.
    • Tian, L. & Estrin, S. (2008). Retained state shareholding in Chinese PLCs: does government ownership always reduce corporate value? Journal of Comparative Economics, 36(1), 74-89.
    • Tirole, J. (1994). The internal organization of government. Oxford Economic Papers, 46(1), 1-29.
    • Vermaelen, T. (1981). Common stock repurchases and market signaling: An empirical study. Journal of Financial Economics, 9(2), 139-183.
    • Wang, S. S. & Jiang, L. (2004). Location of trade, ownership restrictions, and market illiquidity: Examining Chinese A-and H-shares. Journal of Banking & Finance, 28(6), 1273-1297.
    • White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), 817-838.
    • Wu, S., Quan, X., & Xu, L. (2011). CEO power, disclosure quality and the variability of firm performance: Evidence from China. Nankai Business Review International, 2(1), 79-97.
    • Zhang, H. (2005). Share price performance following actual share repurchases. Journal of Banking & Finance, 29(7), 1887- 1901.
Related Articles

  • Income smoothing and market performance: empirical study on manufacturing companies listed in Indonesia stock exchange

    Kencana Dewi , MukhtaruddinORCID , Iqbal Agung Prayudha doi: http://dx.doi.org/10.21511/imfi.15(1).2018.10
    Investment Management and Financial Innovations Volume 15, 2018         Issue #1         pp. 106-119 Views: 1677 Downloads: 292 TO CITE АНОТАЦІЯ

    In the age of modern accounting, the era where income information is viewed to be no longer the main information that investor seeks, income smoothing is proven to be still existing. This study aims to find why income smoothing (IS) still exists in Indonesia Stock Exchange (IDX) by analyzing its effect on the market performance (MP). The study divides MP into three perspectives: market response is representing current investor; market risk (MR) is representing potential investor; and market value (MV) is representing the management. Purposive sampling method is applied in this study and 65 companies are examined throughout 2011–2013.
    Using three models to analyze each of the relation, the results shows that IS only significantly affects the MP of companies in the aspect of market response, while the other aspects, MR and MV, yield insignificant results.

  • The global financial crisis and Islamic banking: the direct exposure to the crisis

    Faisal Alqahtani , David G. Mayes doi: http://dx.doi.org/10.21511/bbs.12(3).2017.08
    Banks and Bank Systems Volume 12, 2017         Issue #3         pp. 100-112 Views: 1422 Downloads: 860 TO CITE АНОТАЦІЯ

    This paper theoretically discusses and reviews the main causes of the crisis, including discrimination, moral failure, poor governance, easy credit, imprudent lending, excessive debt and leverage, and regulation and supervision failure. The implications of the crisis have been reviewed, followed by a critical discussion on the lack of direct exposure to the crisis for Islamic banking, because most, if not all, of the practices and financial instruments that are believed to be responsible for the crisis are not permitted under Islamic banking principles.

  • Food and beverage stocks responding to COVID-19

    Lai Cao Mai PhuongORCID doi: http://dx.doi.org/10.21511/imfi.18(3).2021.30
    Investment Management and Financial Innovations Volume 18, 2021         Issue #3         pp. 359-371 Views: 982 Downloads: 819 TO CITE АНОТАЦІЯ

    This paper investigated how food and beverage (F&B) stocks react to COVID-19. The event study method was applied to four events including the first and second events, were the first COVID-19 positive patients detected in the largest and second-largest economic center of Vietnam. The third and fourth events are related to strong measures to prevent the spread of COVID-19: the nationwide lockdown at the beginning of the second quarter of 2020, and the lockdown of Danang at the beginning of the third quarter of 2020. The results show that the reaction of F&B stock prices to events supports the semi-strong form of efficient market theory. The strong and lasting negative reaction of F&B stocks to the first event can be explained by surprise (first case in Vietnam) and Hochiminh city’s economic engine driving role in the development of Vietnam’s economy. The study finds that heuristic decision-making from nationwide lockdowns (suppression of supply chains during lockdowns) can explain the sub-sector of farming-fishing-ranching products reacted more strongly to the lockdown event in Danang. Based on the research results, this paper provides some policy implications for managers and notes for securities investors.

Download Preview
Close
Investment Management and Financial Innovations
Investment Management and Financial Innovations