Buybacks-Secondaries

Do companies reliably repurchase their stocks at bargain prices, thus providing signals for investors to tag along? In the January 2012 update of their paper entitled “Do Firms Buy Their Stock at Bargain Prices? Evidence from Actual Stock Repurchase Disclosures”, Azi Ben-Rephael, Jacob Oded and Avi Wohl use detailed repurchase data from SEC filings since the beginning of 2004 (effective date for amendments requiring detailed reporting) to examine the timeliness of open market repurchases. Unlike much prior research, they focus on repurchase executions and not announcements. Using information from 10-Q and 10-K filings about actual monthly stock repurchases by S&P 500 firms (as of January 2004) and contemporaneous share price data for 2004 through 2006 (14,669 monthly observations for 416 firms with at least one repurchase), they find that: More…

Past research indicates that returns for stocks associated with share buybacks (secondary offerings) tend to be abnormally high (low) in subsequent years, suggesting that management successfully times the market and investors respond slowly to the timing signal. Do these findings persist in recent data? In their June 2011 paper entitled “The Persistence of Long-Run Abnormal Stock Returns: Evidence from Stock Repurchases and Offerings”, Fangjian Fu, Sheng Huang and Hu Lin extend this research to recent years based on three widely used abnormal stock return estimation methods applied to holding periods of 24, 36 and 48 months. They define recent years as 2003-2008. Using data for 13,992 open market stock repurchases during 1984-2008 and 5,917 seasoned equity offerings (SEO) during 1980-2008, they find that:

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In their March 2011 paper entitled “The Shrinking Space for Anomalies”, George Jiang and Andrew Zhang investigate the robustness of ten well-known anomalies by iteratively “shrinking the stock space” in two ways to determine whether and how the anomalies really work. The ten anomaly variables are: size, book-to-market ratio, momentum, two liquidity measures, idiosyncratic volatility, accrual, capital expenditure, sales growth and net share issuance. The first way of “shrinking the stock space” involves: (1) ranking the universe of stocks by each of the ten anomaly variables into deciles; (2) iteratively trimming deciles from side of a variable distribution that a hedge portfolio would sell and the side that a hedge portfolio would buy; and, (3) retesting the strength of the anomaly associated with the variable after each iterative trimming. The second way of “shrinking the stock space” involves: (1) trimming from the sample stocks with the smallest market capitalizations and the most extreme book-to-market ratios until size, book-to-market and momentum no longer have significant four-factor alphas for value-weighting and equal equal-weighting (thereby “perfecting” the sample for the four-factor model); and, (2) retesting the strength of the anomalies associated with the other seven variables using the perfected sample. This approach obviates weaknesses in alpha measurement via the commonly applied but imperfect three-factor (market, size, book-to-market) and four-factor (plus momentum) risk models. Using firm characteristics and trading data for all non-financial NYSE, AMEX, and NASDAQ common stocks over the period July 1962 through December 2007, they find that: More…

A reader commented and asked: “I searched your site for ‘insider’ and found very little investigation of a relationship between insider buys and stock price movement. Is this an area you could look at, classify and present to readers?” More…

Can investors tell which secondary equity offerings (SEO) are most likely to indicate future stock underperformance? In their November 2009 paper entitled “Managers’ Private Information, Investor Underreaction and Long-Run SEO Underperformance”, Pawel Bilinski and Norman Strong investigate whether the level of surprise in an SEO announcement (indicating the magnitude of management’s private information) systematically relates to future returns for the stock. They define and measure this level of surprise based on market and firm accounting variables available before the SEO announcement and related to: firm overvaluation and firm value uncertainty; costs of issuing stock; options for firm growth; firm leverage and financial constraints; and, stock liquidity. Using firm accounting, characteristic and stock price data associated with 4,422 SEOs and matched non-issuing firms over the period January 1970 through December 2007 (with the last SEO in December 2004 to allow a three-year holding period), they conclude that: More…

A reader noted and asked: “Today’s issue of USA Today has a story about a big drop off in company stock buybacks. Any idea what that has predicted in the past, if anything?” More…

Stock buybacks are often, but not always, an indication that stock price is at a relative low. Are there ways to filter out “not always” cases? In their May 2009 paper entitled “Insider Ownership, Institutional Ownership, and the Timing of Open Market Stock Repurchases”, Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael Simkovic test whether open market repurchases occur at relatively low prices and whether a firm’s ability to time repurchases relates to levels of insider and institutional ownership. This study exploits a recent SEC requirement, effective at the end of 2003, that publicly held firms disclose monthly stock buyback volumes and prices in quarterly filings. Using this monthly buyback volume and price data for the period February 2004 through July 2006, they conclude that: More…

How do professional value investors make investment decisions? Do they beat the market? In their January 2009 preliminary paper entitled “Fundamental Value Investors: Characteristics and Performance”, Wesley Gray and Andrew Kern examine the detailed investment decision process and aggregate performance of professional value investors who participate in ValueInvestorsClub.com, an “exclusive [and confidential] online investment club where top investors share their best ideas.” The founders of ValueInvestorsClub.com are Joel Greenblatt and John Petry of Gotham Capital. Using a sample of 2,912 investment recommendations by ValueInvestorsClub.com members during January 2000 through June 2008, along with associated firm fundamentals and stock return data, they conclude that: More…

Do shareholders realize the full benefits of open market stock buybacks, or are corporate executives increasingly gaming accounting rules and stock buybacks to maximize the value of management stock options? In their December 2008 paper entitled “Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence”, Paul Griffin and Ning Zhu investigate how stock option compensation influences whether, how much and when companies distribute funds as open market stock buybacks rather than dividends. Using data for fiscal years 2005 through 2007 of U.S. public companies, they conclude that: More…

Which stock return anomalies are trustworthy, and which are not? In the June 2007 draft of their paper entitled “Dissecting Anomalies”, Eugene Fama and Kenneth French apply both sorts and regressions to examine the robustness of the momentum, net stock issuance, accruals, profitability and asset growth anomalies. They note that sorts on an anomaly variable offer a simple picture of how average returns vary, but microcaps (a few big stocks) can dominate the performance of a sort-based equal-weighted (value-weighted) hedge portfolio. In addition, sorts are ill-suited to determinations of: (1) the exact relationship between an anomaly variable and returns, and (2) relationships among anomalies. They note also that extreme behavior by microcaps and outliers generally can distort inference from regressions. Using a robust set of firm data for a broad set of U.S. stocks allocated to three size groups (microcap, small and big) over the period 1963-2005, they conclude that: More…