Buybacks-Secondaries

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: More…

Since the mid-1980s, stock repurchases have increasingly displaced dividends as a means for companies to return cash to the equity market. Buybacks affect stock prices by reducing the the denominator in the earnings per share calculation, thereby elevating the value of shares still outstanding. However, firms that announce buybacks may not actually execute them, or may execute them only partially. Are stock buybacks, due to increased information transparency, more reliable now than they used to be? In his recent paper entitled “The Effect of Enhanced Disclosure on Open Market Stock Repurchases”, Michael Simkovic examines whether the SEC requirement that companies disclose repurchase activity on a quarterly basis as of 2004 has increased the likelihood that firms will follow through on buyback announcements. Using repurchase activity data over the 20 months after each of 365 buybacks announced during 2004 for comparison with data from two pre-disclosure studies, he concludes that: More…

Are stock buybacks still good indicators of future strong returns, or have investors driven this anomaly from the market? If they still work, why? In their January 2007 paper entitled “The Nature and Persistence of Buyback Anomalies”, Urs Peyer and Theo Vermaelen investigate whether market recognition has eliminated or attenuated the stock repurchase anomaly. Using a sample of 3,481 repurchase announcements spanning 1991-2001, they find that: More…

Does the business cycle beget a stock supply cycle? In their January 2007 paper entitled “Corporate Event Waves”, Raghavendra Rau and Aris Stouraitis examine the relationships among five different kinds of stock supply additions and subtractions: initial public offerings (IPO); seasoned equity offerings (SEO); stock-financed acquisitions; cash-financed acquisitions; and, stock repurchases. Using data for 151,000 U.S. corporate stock supply transactions during the period 1980-2004, they conclude that: More…

Are company stock buybacks equivalent to cash dividends for stockholders? Conversely, are company sales of stock “undividends” for stockholders? A forthcoming article in the April 2007 Journal of Finance addresses these questions. In the underlying September 2005 paper entitled “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing”, Jacob Boudoukh, Roni Michaely, Matthew Richardson and Michael Roberts compare the predictive powers of several alternative measures of company payout encompassing dividends, stock repurchases and stock issuances. Using a maximum sample period of 1926-2003 (with stock repurchase data available only since 1971), they find that: More…

Do firms issue more stock when their officers see compelling uses for new funds, or when these executives think company stock is overvalued? In the November 2006 draft of their paper entitled “Behavioral and Rational Explanations of Stock Price Performance around SEO’s: Evidence from a Decomposition of Market-to-Book Ratios”, Michael Hertzel and Zhi Li first use firm accounting data to decompose market-to-book ratios into misvaluation and growth opportunity components, and then examine how these components relate to company stock returns after secondary offerings. Using financial and stock return data for a sample of 4,325 seasoned equity offerings during 1970-2004, they conclude that: More…

Investors might suppose that a company repurchases shares when firm officers believe that the market is undervaluing its stock. Since these officers are highly informed, the stock is subsequently likely to outperform the market. How could executives be sure that their company’s stock is undervalued? In their November 2006 paper entitled “Earnings Management and Firm Performance Following Open-market Repurchases”, Guojin Gong, Henock Louis and Amy Sun investigate whether company management orchestrates stock undervaluation through earnings management (abnormal accruals) prior to executing share repurchases. Using financial and stock price data over the period 1984-2002 (1,720 open-market repurchase announcements that are followed by actual repurchases), they conclude that: More…

The stocks of companies issuing equity/debt tend to underperform. Are there explanations for this tendency other than good market timing by corporate executives of such companies? Are these executives in the driver’s seat, selling high, or are they just along for a ride? In their November 2006 paper entitled “The New Issues Puzzle: Testing the Investment-Based Explanation”, Evgeny Lyandres, Le Sun and Lu Zhang investigate alternative theories of corporate investment as explanations for the subsequent underperformance of companies issuing equity/debt. Using equity/debt issuance data for 1970-2005, they conclude that: More…

Can investors/traders amplify excess returns by combining value investing with stock repurchase activities? In other words, do companies with low price-fundamentals ratios that buy back stock outperform value companies in general? In their recent paper entitled “Corporate Financing Activities and Contrarian Investment”, Turan Bali, Ozgur Demirtas and Armen Hovakimian examine returns for investing strategies that combine value indicators and stock repurchase/issuance activities. Using monthly return data and company financial statements for the period May 1972 to April 2002, they find that: More…

The most informed investors in a firm’s stock are the executives and board members of the company. They have access to more, and more current, private information than anyone else. Do their actions in buying or selling equity or debt on behalf of the company reliably indicate its concurrent stock valuation? Do financial analysts accurately interpret these signals for investors? In the June 2005 update of their paper entitled “The Relation Between Corporate Financing Activities, Analysts’ Forecasts and Stock Returns”, Mark Bradshaw, Scott Richardson and Richard Sloan investigate the relationships among: (1) a simple cash flow-based measure of corporate financing activities; (2) analyst reactions to these activities; and, (3) stock returns. Corporate financing activities include selling and buying back of common stock, preferred stock, convertible debt, subordinated debt, notes payable, debentures and capitalized lease obligations. Using financial data spanning 1971-2000 and analyst forecast data spanning 1975-2000, they conclude that: More…