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:
- For the full sample, all three measurement methods yield significantly positive (negative) average gross returns of 9% to 12% (-11% to -20%) for stocks during the 36 months after repurchase (SEO) announcements.
- For the 2003-2010 subsample (26% of the repurchases and 24% of the SEOs in the total sample), all three methods agree that there is neither significant outperformance during the 36 months after repurchase announcements nor significant underperformance during the 36 months after SEO announcements. In fact, for two of the three return calculation methods, gross abnormal returns after repurchases are negative.
- Results are consistent for 24-month and 48-month holding periods.
- Market timing appears to be less of a motivation for firms announcing repurchases or SEOs in recent years compared to early years. In the early subsample, firms announcing repurchases have a significantly higher average book-to-market ratio and a lower average past-year return than industry median. In the recent subsample, firms announcing repurchases have an average book-to-market ratio and average prior-year return close to industry median. Evidence from SEOs is (conversely) similar.
- Institutional ownership (especially high in the recent subsample) tends to suppress the positive (negative) abnormal performance following repurchase (SEO) announcements.
- Three-day gross abnormal returns around repurchase announcements are on average less positive in the recent subsample (1.82%) than the early subsample (2.65%). Similarly, they are on average less negative around SEO announcements (-2.55% versus -2.85%).
In summary, evidence indicates that average long-run positive (negative) abnormal performance following stock repurchase (secondary offering) announcements, which used to be robust, disappears in recent years. Also, short-term reactions to such announcements are on average less pronounced in recent data.
Cautions regarding findings include:
- Return calculations are gross, not net. Including reasonable trading frictions would reduce these returns.
- Short-term repurchase and secondary offering announcement returns may still be exploitable. However, the three-day gross returns reported in the paper begin before announcements, so unknown parts of these returns are not exploitable.
Frequently Asked Questions
What is a long-run abnormal stock return after a buyback or secondary offering announcement?
A long-run abnormal stock return is the return a stock earns over a multi-year window after an event, such as a buyback or seasoned equity offering (SEO) announcement, beyond what a benchmark model predicts. The Fu and Huang study measures it over 24, 36 and 48 months, focusing on 36 months, using three-factor (market, size, book-to-market) alphas and matched control stocks. A buyback is a firm repurchasing its own shares, while an SEO is a public firm issuing additional shares.
Do stock buyback announcements still predict higher long-run returns?
Stock buyback announcements no longer show significant long-run outperformance in recent data. Across 1985-2010, stocks earned significantly positive gross abnormal returns of 9% to 12% over the 36 months after repurchase announcements. In the 2003-2010 subsample, none of the three measurement methods found significant outperformance, and two of the three produced negative gross abnormal returns. Results were consistent for 24- and 48-month holding periods.
How are long-run abnormal returns after buybacks and equity offerings measured?
Long-run abnormal returns after buybacks and seasoned equity offerings were measured three ways: calendar-time three-factor portfolio alpha, event-time three-factor alpha, and returns in excess of control stocks matched on size, book-to-market ratio and six-month past return. The study applied these to 14,538 open market repurchase announcements (1985-2010) and 6,645 SEO announcements (1980-2010), excluding financials and utilities. It compared 2003-2010 results with earlier data and also measured three-day abnormal returns around announcements relative to the value-weighted U.S. equity market.
Why did buyback and SEO announcement effects differ between early and recent periods, and is market timing the reason?
Market timing appears to be less of a motivation for firms announcing buybacks or SEOs in recent years than in earlier years. Early-period repurchasing firms had significantly higher book-to-market ratios and lower past-year returns than the industry median, whereas recent repurchasers were close to the industry median on both. Higher institutional ownership in the recent subsample also tends to suppress the positive (negative) abnormal performance after repurchases (SEOs). Three-day gross abnormal returns around repurchase announcements fell from 2.65% in the early subsample to 1.82% in the recent one.
What are the limitations of using buyback and SEO announcement returns as a trading signal?
The reported buyback and SEO announcement returns are gross, not net, so including reasonable trading frictions would reduce them. Short-term announcement reactions may still be exploitable, but the three-day gross returns in the study begin one day before the announcement, so unknown portions of them are not capturable. Average three-day gross returns were also less pronounced in the recent subsample: 1.82% for repurchases versus 2.65% earlier, and -2.55% versus -2.85% for SEOs.