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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.

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

Aggregate Buyback Activity a Useful Stock Market Indicator?

A reader noted and asked: “Today’s issue of USA Today has a story about a big drop off in company stock buybacks. Any idea what that has predicted in the past, if anything?” Keep Reading

Modifiers of the Stock Buyback Indicator

Stock buybacks are often, but not always, an indication that stock price is at a relative low. Are there ways to filter out “not always” cases? In their May 2009 paper entitled “Insider Ownership, Institutional Ownership, and the Timing of Open Market Stock Repurchases”, Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael Simkovic test whether open market repurchases occur at relatively low prices and whether a firm’s ability to time repurchases relates to levels of insider and institutional ownership. This study exploits a recent SEC requirement, effective at the end of 2003, that publicly held firms disclose monthly stock buyback volumes and prices in quarterly filings. Using this monthly buyback volume and price data for the period February 2004 through July 2006, they conclude that: Keep Reading

Methods and Results for ValueInvestorsClub.com Members

How do professional value investors make investment decisions? Do they beat the market? In their January 2009 preliminary paper entitled “Fundamental Value Investors: Characteristics and Performance”, Wesley Gray and Andrew Kern examine the detailed investment decision process and aggregate performance of professional value investors who participate in ValueInvestorsClub.com, an “exclusive [and confidential] online investment club where top investors share their best ideas.” The founders of ValueInvestorsClub.com are Joel Greenblatt and John Petry of Gotham Capital. Using a sample of 2,912 investment recommendations by ValueInvestorsClub.com members during January 2000 through June 2008, along with associated firm fundamentals and stock return data, they conclude that: Keep Reading

Big Winners from Stock Buybacks?

Do shareholders realize the full benefits of open market stock buybacks, or are corporate executives increasingly gaming accounting rules and stock buybacks to maximize the value of management stock options? In their December 2008 paper entitled “Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence”, Paul Griffin and Ning Zhu investigate how stock option compensation influences whether, how much and when companies distribute funds as open market stock buybacks rather than dividends. Using data for fiscal years 2005 through 2007 of U.S. public companies, they conclude that: Keep Reading

Fama and French Dissect Anomalies

Which stock return anomalies are trustworthy, and which are not? In the June 2007 draft of their paper entitled “Dissecting Anomalies”, Eugene Fama and Kenneth French apply both sorts and regressions to examine the robustness of the momentum, net stock issuance, accruals, profitability and asset growth anomalies. They note that sorts on an anomaly variable offer a simple picture of how average returns vary, but microcaps (a few big stocks) can dominate the performance of a sort-based equal-weighted (value-weighted) hedge portfolio. In addition, sorts are ill-suited to determinations of: (1) the exact relationship between an anomaly variable and returns, and (2) relationships among anomalies. They note also that extreme behavior by microcaps and outliers generally can distort inference from regressions. Using a robust set of firm data for a broad set of U.S. stocks allocated to three size groups (microcap, small and big) over the period 1963-2005, they conclude that: Keep Reading

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

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: Keep Reading

Increased Reliability for Buyback Announcements?

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: Keep Reading

The Buyback Indicator Still Going Strong?

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: Keep Reading

The Stock Supply Cycle

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: Keep Reading

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