IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Buyback behavior of initial public offering firms

  • Chen, Sheng-Syan
  • Ho, Kim Wai
  • Huang, Chia-Wei
  • Wang, Yanzhi
Registered author(s):

    We examine the motives behind the share repurchase decisions of initial public offering (IPO) firms by studying the stock and operating performance after the IPO date. We find that IPO firms that announce repurchases within 3years of IPO dates exhibit poorer long-run abnormal operating performance than other IPO firms. These IPO firms also experience poorer stock return performance and downward analyst forecast revisions. Moreover, these firms show intensive insider selling transactions after the IPO date. These results for IPO announcing repurchase firms are consistent with the misleading hypothesis, which suggests that these IPO firms mislead investors by announcing repurchases as false signals.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426612002282
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 1 ()
    Pages: 32-42

    as
    in new window

    Handle: RePEc:eee:jbfina:v:37:y:2013:i:1:p:32-42
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Alon Brav & Christopher Geczy & Paul A. Gompers, . "Is the Abnormal Return Following Equity Issuances Anomalous?," Rodney L. White Center for Financial Research Working Papers 02-99, Wharton School Rodney L. White Center for Financial Research.
    2. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, 08.
    3. Mark L. Mitchell & Erik Stafford, 1997. "Managerial Decisions and Long-Term Stock Price Performance," CRSP working papers 453, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    4. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
    5. Josef Lakonishok & Andrei Shleifer & Robert W. Vishny, 1993. "Contrarian Investment, Extrapolation, and Risk," University of Chicago - George G. Stigler Center for Study of Economy and State 84, Chicago - Center for Study of Economy and State.
    6. Bens, Daniel A. & Nagar, Venky & Skinner, Douglas J. & Wong, M. H. Franco, 2003. "Employee stock options, EPS dilution, and stock repurchases," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 51-90, December.
    7. Konan Chan & John W. Cooney & Joonghyuk Kim & Ajai K. Singh, 2008. "The IPO Derby: Are There Consistent Losers and Winners on This Track?," Financial Management, Financial Management Association International, vol. 37(1), pages 45-79, 03.
    8. Jerry Cao & Josh Lerner, 2006. "The Performance of Reverse Leveraged Buyouts," NBER Working Papers 12626, National Bureau of Economic Research, Inc.
    9. Harris, Oneil & Glegg, Charmaine, 2009. "Governance quality and privately negotiated stock repurchases: Evidence of agency conflict," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 317-325, February.
    10. David Ikenberry & Josef Lakonishok & Theo Vermaelen, 1994. "Market Underreaction to Open Market Share Repurchases," NBER Working Papers 4965, National Bureau of Economic Research, Inc.
    11. Paul Schultz, 2003. "Pseudo Market Timing and the Long-Run Underperformance of IPOs," Journal of Finance, American Finance Association, vol. 58(2), pages 483-518, 04.
    12. Chan, Konan & Ikenberry, David L. & Lee, Inmoo & Wang, Yanzhi, 2010. "Share repurchases as a potential tool to mislead investors," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 137-158, April.
    13. Loughran, Tim & Ritter, Jay R, 1997. " The Operating Performance of Firms Conducting Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 52(5), pages 1823-50, December.
    14. Fama, Eugene F & French, Kenneth R, 2000. "Forecasting Profitability and Earnings," The Journal of Business, University of Chicago Press, vol. 73(2), pages 161-75, April.
    15. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    16. Guojin Gong & Henock Louis & Amy X. Sun, 2008. "Earnings Management and Firm Performance Following Open-Market Repurchases," Journal of Finance, American Finance Association, vol. 63(2), pages 947-986, 04.
    17. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
    18. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    19. Laura Casares Field & Jonathan M. Karpoff, 2002. "Takeover Defenses of IPO Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1857-1889, October.
    20. Vermaelen, Theo, 1981. "Common stock repurchases and market signalling : An empirical study," Journal of Financial Economics, Elsevier, vol. 9(2), pages 139-183, June.
    21. Hribar, Paul & Jenkins, Nicole Thorne & Johnson, W. Bruce, 2006. "Stock repurchases as an earnings management device," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 3-27, April.
    22. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    23. Jain, Bharat A. & Shekhar, Chander & Torbey, Violet, 2009. "Payout initiation by IPO firms: The choice between dividends and share repurchases," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1275-1297, November.
    24. John D. Lyon & Brad M. Barber & Chih-Ling Tsai, 1999. "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, 02.
    25. Murali Jagannathan & Clifford Stephens, 2003. "Motives for Multiple Open-Market Repurchase Programs," Financial Management, Financial Management Association, vol. 32(2), Summer.
    26. Brous, Peter A. & Kini, Omesh, 1993. "A reexamination of analysts' earnings forecasts for takeover targets," Journal of Financial Economics, Elsevier, vol. 33(2), pages 201-225, April.
    27. Jain, Bharat A & Kini, Omesh, 1994. " The Post-Issue Operating Performance of IPO Firms," Journal of Finance, American Finance Association, vol. 49(5), pages 1699-1726, December.
    28. Allen, Jeffrey W, 2001. "Private Information and Spin-Off Performance," The Journal of Business, University of Chicago Press, vol. 74(2), pages 281-306, April.
    29. Erik Lie, 2001. "Detecting Abnormal Operating Performance: Revisited," Financial Management, Financial Management Association, vol. 30(2), Summer.
    30. Oswald, Dennis & Young, Steven, 2008. "Share reacquisitions, surplus cash, and agency problems," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 795-806, May.
    31. Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004. "Capital Investments and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(04), pages 677-700, December.
    32. Eugene F. Fama, . "Market Efficiency, Long-term Returns, and Behavioral Finance," CRSP working papers 340, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    33. Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, vol. 53(1), pages 313-333, 02.
    34. Chaney, Paul K. & Hogan, Chris E. & Jeter, Debra C., 1999. "The effect of reporting restructuring charges on analysts' forecast revisions and errors," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 261-284, July.
    35. Loughran, Tim & Ritter, Jay R., 2000. "Uniformly least powerful tests of market efficiency," Journal of Financial Economics, Elsevier, vol. 55(3), pages 361-389, March.
    36. Gustavo Grullon & Roni Michaely, 2004. "The Information Content of Share Repurchase Programs," Journal of Finance, American Finance Association, vol. 59(2), pages 651-680, 04.
    37. Gustavo Grullon & Roni Michaely & Shlomo Benartzi & Richard H. Thaler, 2005. "Dividend Changes Do Not Signal Changes in Future Profitability," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1659-1682, September.
    38. Oded, Jacob, 2011. "Stock repurchases: How firms choose between a self tender offer and an open-market program," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3174-3187.
    39. Lie, Erik, 2005. "Operating performance following open market share repurchase announcements," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 411-436, September.
    40. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    41. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    42. Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
    43. Liang, Woan-lih, 2012. "Information content of repurchase signals: Tangible or intangible information?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 261-274.
    44. Barber, Brad M. & Lyon, John D., 1996. "Detecting abnormal operating performance: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 41(3), pages 359-399, July.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:1:p:32-42. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.