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Stock Repurchase in Korea: Market Reactions and Operating Performance

Author

Listed:
  • Youngkyu Park

    (Graduate School of Management, Korea Advanced Institute of Science and Technology, Seoul, Korea)

  • Kooyul Jung

    (Graduate School of Management, Korea Advanced Institute of Science and Technology, 207-43 Chongyangni2-dong, Dongdaemoon-gu, Seoul 130-722, Korea)

Abstract

This study examines the motive for stock repurchase. We examine four hypotheses — undervaluation, signaling, free cash flow, and optimal leverage hypotheses — using both short-run and long-run market reactions. We find that the undervaluation hypothesis is most consistent with both short-run and long-run tests. Improvement in operating performance following repurchase suggests the signaling hypothesis. However, the signaling hypothesis is supported only in the long-run test, not the short-run test, suggesting that market underreaction exists to the signaling initially. Of the control variables, the target purchase ratio and ownership by the largest shareholders are found significant, suggesting that the magnitude of repurchase and the ownership increase motive by the largest shareholders are also important factors that explain the repurchase.

Suggested Citation

  • Youngkyu Park & Kooyul Jung, 2005. "Stock Repurchase in Korea: Market Reactions and Operating Performance," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 81-112.
    • Handle: RePEc:wsi:rpbfmp:v:08:y:2005:i:01:n:s0219091505000300
    DOI: 10.1142/S0219091505000300
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    Citations

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    Cited by:

    1. Alquhaif, Abdulsalam & Al-Gamrh, Bakr & Abdul Latif, Rohaida, 2020. "An overview of share buybacks: A descriptive case from Malaysia," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    2. Wang, Li-Hsun & Lin, Chu-Hsiung & Fung, Hung-Gay & Chen, Hsien-Ming, 2013. "An analysis of stock repurchase in Taiwan," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 497-513.
    3. Mohamed Albaity & Diana Syafiza Said, 2016. "Impact of Open-Market Share Repurchases on Long-Term Stock Returns," SAGE Open, , vol. 6(4), pages 21582440166, October.
    4. Dimitris Andriosopoulos & Chrysovalantis Gaganis & Fotios Pasiouras, 2016. "Prediction of open market share repurchases and portfolio returns: evidence from France, Germany and the UK," Review of Quantitative Finance and Accounting, Springer, vol. 46(2), pages 387-416, February.
    5. Joanna Golden, 2018. "The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-41, June.

    More about this item

    Keywords

    Stock repurchase; undervaluation; signaling; free cash flow;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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