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REIT Stock Repurchases: Completion Rates, Long - Run Returns, and the Straddle Hypothesis

  • Gregory L. Adams

    ()

    (Brigham Young University, Provo, UT 84602)

  • James C. Brau

    ()

    (Brigham Young University, Provo, UT 84602)

  • Andrew Holmes

    ()

    (Brigham Young University, Provo, UT 84602)

Registered author(s):

    This study of real estate investment trusts (REITs) analyzes three possible explanations for the stock price reaction to a repurchase announcement and the subsequent repurchase behavior of managers under each hypothesis. Two of the hypotheses, the signaling hypothesis and the exchange option hypothesis, are established in the existing literature; the third hypothesis is a modification of the exchange option hypothesis. The exchange option hypothesis is extended to allow for additional flexibility in management decisions. This extended exchange option hypothesis is termed the ‘‘straddle’’ hypothesis because it provides management with both a call and put option. The empirical analyses show the straddle hypothesis is a more robust explanation of changes in shares outstanding in the postannouncement period than the alternative explanations.

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    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol29n02/01.115_136.pdf
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    Article provided by American Real Estate Society in its journal journal of Real Estate Research.

    Volume (Year): 29 (2007)
    Issue (Month): 2 ()
    Pages: 115-136

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    Handle: RePEc:jre:issued:v:29:n:2:2007:p:115-136
    Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
    Web page: http://www.aresnet.org/
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    Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
    Web: http://pages.jh.edu/jrer/about/get.htm Email:


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    1. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208.
    2. David L. Ikenberry & Theo Vermaelen, 1996. "The Option to Repurchase Stock," Financial Management, Financial Management Association, vol. 25(4), Winter.
    3. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
    4. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
    5. Ahron R. Ofer & Anjan V. Thakor, 2004. "A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchase and Dividends," Finance 0411031, EconWPA.
    6. 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.
    7. Masulis, Ronald W., 1980. "The effects of capital structure change on security prices : A study of exchange offers," Journal of Financial Economics, Elsevier, vol. 8(2), pages 139-178, June.
    8. Erasmo Giambona & Carmelo Giaccotto & C.F. Sirmans, 2005. "The Long-Run Performance of REIT Stock Repurchases," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(2), pages 351-380, 06.
    9. Healy, Paul M. & Palepu, Krishna G., 1988. "Earnings information conveyed by dividend initiations and omissions," Journal of Financial Economics, Elsevier, vol. 21(2), pages 149-175, September.
    10. Nohel, Tom & Tarhan, Vefa, 1998. "Share repurchases and firm performance:: new evidence on the agency costs of free cash flow," Journal of Financial Economics, Elsevier, vol. 49(2), pages 187-222, August.
    11. Vermaelen, Theo, 1981. "Common stock repurchases and market signalling : An empirical study," Journal of Financial Economics, Elsevier, vol. 9(2), pages 139-183, June.
    12. Wiggins, James B, 1994. "Open Market Stock Repurchase Programs and Liquidity," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(2), pages 217-29, Summer.
    13. Dann, Larry Y., 1981. "Common stock repurchases : An analysis of returns to bondholders and stockholders," Journal of Financial Economics, Elsevier, vol. 9(2), pages 113-138, June.
    14. James C. Brau & Andrew Holmes, 2006. "Why Do REITs Repurchase Stock? Extricating the Effect of Managerial Signaling in Open Market Share Repurchase Announcements," Journal of Real Estate Research, American Real Estate Society, vol. 28(1), pages 1-24.
    15. 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.
    16. Lie, Erik, 2000. "Excess Funds and Agency Problems: An Empirical Study of Incremental Cash Disbursements," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 219-47.
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