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Market Adapted to Buybacks and Secondaries?

Posted in Buybacks-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:

  • 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.
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