Blog - Investing Notes
August 24, 2007 - An International
Test of Share Buyback and Secondary Offering Effects on Stock Returns
Are share buybacks/secondary offerings consistently predictive of good/poor
future stock returns around the globe? In their August 2007 draft paper
entitled "Share
Issuance and Cross-Sectional Returns: International Evidence", David
McLean, Jeffrey Pontiff and Akiko Watanabe look at the predictive power
in international markets of firm-level net share issuance over the past
one and five years for stock returns over future periods ranging from
the next month to the next three years. Using share issuance data, firm
fundamental data and monthly stock returns over the period July 1981
through June 2006 for a large sample of non-U.S. companies in 41 countries,
they conclude that:
- Non-U.S. firms tend to issue additional shares less frequently
but in larger offerings than U.S. firms.
- Firms with high past returns are more likely to issue more shares.
Firms with high (low) book-to-market ratios tend to issue (buy back)
more shares.
- Both one-year and five-year measures of past share issuance predict
stock returns for one-month to three-year future holding periods,
most strongly for shorter-term returns. Across the entire sample of
stocks, next-month returns decline by 0.16% for each standard deviation
increase in annual net issuance of shares (half the effect reported
elsewhere for U.S. stocks).
- For non-U.S. stocks, the effect of secondary offerings is
more statistically significant than both the size and momentum effects,
and is similar in significance to the book-to-market effect. As in
the U.S., the secondary offering effect holds for both small and large
firms.
- While the negative secondary offering effect is typically
stronger internationally than in the U.S., the positive buyback
effect is generally weaker. In the U.S., the buyback effect
exists among both small and large firms, while internationally it
occurs mostly among small firms.
- Evidence suggests that international issuance effects are not
generally due to attempts by managers to time the market for their
stocks.
In summary, in international markets, secondary share offerings
reliably predict poor future stock returns, but share buybacks predict
good future returns only for small firms.
For related research, see Blog
Synthesis: Buybacks and Secondaries.
