Author
Listed:
- June Dung Pham
- Thanh Nguyen
- Hari Adhikari
- Trang Minh Pham
Abstract
Open-market stock repurchase announcements are generally perceived by the stock market as a signal of firm undervaluation. Our study shows that repurchase announcements that were preceded by SEOs of other firms in the same industry within the prior six months (namely SEO-RPs) are more likely the result of lacking investment opportunities than signaling undervaluation, especially in concentrated industries. Specifically, we find investors response negatively to SEO-RP announcements while react positively to regular repurchase announcements. The higher the intensity of SEO activities in the industry, the more negative market reaction to SEO-RP announcements. We argue that the market doesn’t expect a repurchase announcement when other rival firms are raising more capital via SEOs. These SEO-RPs represent a negative surprise to the market and lead to a downward adjustment in value of the repurchasing firms in the announcement window. In the three-year post-announcement periods, the SEO-RP firms underperform regular repurchasing firms in both stock return and operating performance. Moreover, while regular repurchasing firms gradually increase their capital expenditures, SEO-RP firms significantly reduce their capital expenditures. These findings support our arguments that repurchase announcements that immediately follow SEOs of rival firms (SEO-RPs) more likely indicate the announcing firms entering a slower growth rate with fewer investment opportunities than signal the undervaluation problem. The underperformance in stock return and operation combined with a significant reduction in capital expenditures in the post-announcement periods are consistent with this logic and also explain why the market reacts negatively to SEO-RP announcements.
Suggested Citation
June Dung Pham & Thanh Nguyen & Hari Adhikari & Trang Minh Pham, 2020.
"Unexpected Share Repurchase Announcements,"
Journal of Behavioral Finance, Taylor & Francis Journals, vol. 21(3), pages 248-265, July.
Handle:
RePEc:taf:hbhfxx:v:21:y:2020:i:3:p:248-265
DOI: 10.1080/15427560.2019.1692208
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