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Are executives good market timers on behalf of their companies? Do they initiate share repurchases (seasoned equity offerings) when their stocks are undervalued (overvalued)? In other words, can they reliably time the market with respect to their stocks? These blog entries relate to stock buybacks and secondary offerings.

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Repurchases, Issuances and Earnings Surprises

Can investors exploit stock repurchase and issuance activity to predict market reaction to the next firm earnings release? In the May 2015 version of their paper entitled “Are Earnings Predictable?”, Shahram Amini and Vijay Singal test whether firm executives take advantage of superior information to time repurchases (issuances) of stock just before unexpectedly good (bad) earnings announcements. They focus on firms announcing repurchases of at least 5% and prices for sales of at least 10% of outstanding shares within 16 to 30 trading days before or after earnings releases. Using stock prices for 891 (1,072) repurchase announcements and 1,415 (1,604) issuance price announcements within 16 to 30 days before (after) earnings releases during 1987 through 2013, they find that: Keep Reading

Progressively Comprehensive Payout Metrics

Do firm efforts to pay shareholders directly (via dividends) and indirectly (via share repurchases and paydown of debt) translate to stock outperformance? In their May 2012 paper entitled “Enhancing the Investment Performance of Yield-Based Strategies”, flagged by a subscriber, Wesley Gray and Jack Vogel compare aggregate performance statistics of stocks ranked by the following four progressively comprehensive yield metrics:

  1. DIV: dividend yield.
  2. PAY1: payout encompassing dividend plus share repurchase yield.
  3. PAY2: payout encompassing dividend plus net repurchase (repurchase minus issuance) yield.
  4. SHYD: comprehensive shareholder yield encompassing dividend plus net repurchase plus net debt paydown (annual difference in debt load divided by market capitalization) yield.

They focus on annually rebalanced, value-weighted portfolios with financial stocks excluded. Using monthly return, dividend, stock repurchase/issuance, debt load and other accounting data for a broad sample of U.S. stocks during 1971 through 2011, they find that: Keep Reading

Stock Buybacks Indicate Future Price Jumps from Takeovers?

Do stocks of firms that initiate buybacks (open market stock repurchases) tend to appreciate due to elevated takeover risk? In the October 2013 draft of their paper entitled “The Timing and Source of Long-run Returns Following Repurchases”, Leonce Bargeron, Alice Bonaime and Shawn Thomas investigate the timing and source of the abnormal return associated with stock repurchases. They define abnormal return as three-factor (market, size, book-to-market) alpha from equally weighted portfolios of stocks associated with repurchasing activity. They focus on subsequent repurchase and takeover announcements as potential sources of long-run outperformance after repurchases. Using firm characteristics and monthly returns for stocks involved in 18,293 open market repurchase authorization announcements, with focus on 3,089 that have associated repurchase completion announcements, during January 1980 through September 2010, they find that: Keep Reading

Market Adapted to Buybacks and Secondaries?

Has the market evolved to extinguish exploitability of reactions to corporate stock buyback and secondary offering activities? In their December 2012 draft paper entitled “The Persistence of Long-Run Abnormal Stock Returns: Evidence from Stock Repurchases and Offerings”, Fangjian Fu and Sheng Huang compare recent (2003-2010) long-run abnormal returns following U.S. corporate stock buyback and Seasoned Equity Offering (SEO) announcements to those in older data (1985-2002). They employ three distinct methods to measure long-run abnormal returns: (1) calendar-time three-factor (market, size, book-to-market ratio) portfolio alpha; (2) three-factor alpha in event time; and, (3) returns in excess of those for control stocks matched on size, book-to-market ratio and six-month past return. They consider post-announcement holding periods of 24, 36 and 48 months, focusing on 36 months. They also examine three-day abnormal returns relative to the value-weighted U.S. equity market from one day before through one day after repurchase and SEO announcements. Using returns, firm characteristics and institutional ownership data associated with 14,538 open market repurchase announcements during 1985-2010 and 6,645 SEO announcements during 1980-2010 (excluding financials and utilities), they find that: Keep Reading

Testing U.S. Equity Anomalies Worldwide

Do widely acknowledged U.S. equity market anomalies exist in other stock markets? If so, why? In his November 2011 paper entitled “Equity Anomalies Around the World”, Steve Fan investigates whether a number of equity market anomalies found among U.S. stocks (asset growth, book-to-market ratio, investment-to-assets ratio, six-month momentum with skip-month, net stock issuance, size and total accruals) also occur in other equity markets and the degree to which such anomalies relate to stock-unique (idiosyncratic) risk. He measures raw anomaly strength based on gross returns from hedge (“zero-cost”) portfolios that are long and short equally weighted extreme quintiles of stocks ranked annually for each accounting variable and every six months for momentum (with overlapping momentum portfolios). To estimate alphas, he adjusts raw returns for the three Fama-French risk factors (market, book-to-market, size) or three alternative investment-based risk factors (market, investment, return on assets). Using monthly common stock return data and associated firm characteristics/accounting data for 43 country stock markets during 1989 through 2009, he finds that: Keep Reading

Buyback Size Effect?

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: Keep Reading

Extinction of the Buyback/Secondary Offering Effect?

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:

Keep Reading

Robustness Tests for Ten Popular Stock Return Anomalies

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: Keep Reading

Research on the Value of Insider Trading Data

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?” Keep Reading

Parsing Impacts of SEOs on Future Stock Returns

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: Keep Reading

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