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An International Test of Share Buyback and Secondary Offering Effects on Stock Returns

Posted in 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:

  • 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.

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