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Economic Sources of Gain in Stock Repurchases

Listed author(s):
  • Chan, Konan
  • Ikenberry, David
  • Lee, Inmoo
Registered author(s):

    Previous studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run performance. The initial reaction provides some support for the mispricing story. However, subsequent earnings-related information shocks suggest that the initial market reaction is incomplete and that long-run performance may be informative. The long-horizon return evidence is most consistent with the mispricing hypothesis and, to some degree, the free cash flow hypothesis. We find little support for the leverage hypothesis.

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    Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

    Volume (Year): 39 (2004)
    Issue (Month): 03 (September)
    Pages: 461-479

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    Handle: RePEc:cup:jfinqa:v:39:y:2004:i:03:p:461-479_00
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    Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK

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