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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.

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

Net Flow of Cash from Company to Investors as a Return Indicator

Are company stock buybacks equivalent to cash dividends for stockholders? Conversely, are company sales of stock “undividends” for stockholders? A forthcoming article in the April 2007 Journal of Finance addresses these questions. In the underlying September 2005 paper entitled “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing”, Jacob Boudoukh, Roni Michaely, Matthew Richardson and Michael Roberts compare the predictive powers of several alternative measures of company payout encompassing dividends, stock repurchases and stock issuances. Using a maximum sample period of 1926-2003 (with stock repurchase data available only since 1971), they find that: Keep Reading

When a Secondary Stock Offering Is (or Is Not) Bad News

Do firms issue more stock when their officers see compelling uses for new funds, or when these executives think company stock is overvalued? In the November 2006 draft of their paper entitled “Behavioral and Rational Explanations of Stock Price Performance around SEO’s: Evidence from a Decomposition of Market-to-Book Ratios”, Michael Hertzel and Zhi Li first use firm accounting data to decompose market-to-book ratios into misvaluation and growth opportunity components, and then examine how these components relate to company stock returns after secondary offerings. Using financial and stock return data for a sample of 4,325 seasoned equity offerings during 1970-2004, they conclude that: Keep Reading

Stock Buybacks Are Set-ups?

Investors might suppose that a company repurchases shares when firm officers believe that the market is undervaluing its stock. Since these officers are highly informed, the stock is subsequently likely to outperform the market. How could executives be sure that their company’s stock is undervalued? In their November 2006 paper entitled “Earnings Management and Firm Performance Following Open-market Repurchases”, Guojin Gong, Henock Louis and Amy Sun investigate whether company management orchestrates stock undervaluation through earnings management (abnormal accruals) prior to executing share repurchases. Using financial and stock price data over the period 1984-2002 (1,720 open-market repurchase announcements that are followed by actual repurchases), they conclude that: Keep Reading

Avoid Companies Stretching for Diminishing Returns?

The stocks of companies issuing equity/debt tend to underperform. Are there explanations for this tendency other than good market timing by corporate executives of such companies? Are these executives in the driver’s seat, selling high, or are they just along for a ride? In their November 2006 paper entitled “The New Issues Puzzle: Testing the Investment-Based Explanation”, Evgeny Lyandres, Le Sun and Lu Zhang investigate alternative theories of corporate investment as explanations for the subsequent underperformance of companies issuing equity/debt. Using equity/debt issuance data for 1970-2005, they conclude that: Keep Reading

Combining Value Indicators with Stock Repurchasing

Can investors/traders amplify excess returns by combining value investing with stock repurchase activities? In other words, do companies with low price-fundamentals ratios that buy back stock outperform value companies in general? In their recent paper entitled “Corporate Financing Activities and Contrarian Investment”, Turan Bali, Ozgur Demirtas and Armen Hovakimian examine returns for investing strategies that combine value indicators and stock repurchase/issuance activities. Using monthly return data and company financial statements for the period May 1972 to April 2002, they find that: Keep Reading

Do What the Company Does?

The most informed investors in a firm’s stock are the executives and board members of the company. They have access to more, and more current, private information than anyone else. Do their actions in buying or selling equity or debt on behalf of the company reliably indicate its concurrent stock valuation? Do financial analysts accurately interpret these signals for investors? In the June 2005 update of their paper entitled “The Relation Between Corporate Financing Activities, Analysts’ Forecasts and Stock Returns”, Mark Bradshaw, Scott Richardson and Richard Sloan investigate the relationships among: (1) a simple cash flow-based measure of corporate financing activities; (2) analyst reactions to these activities; and, (3) stock returns. Corporate financing activities include selling and buying back of common stock, preferred stock, convertible debt, subordinated debt, notes payable, debentures and capitalized lease obligations. Using financial data spanning 1971-2000 and analyst forecast data spanning 1975-2000, they conclude that: Keep Reading

What Drives Buybacks and Insider Trading?

In their recent paper entitled “Stock Market Anomalies: What Can We Learn from Repurchases and Insider Trading?”, John Core, Wayne Guay, Scott Richardson and Rodrigo Verdi investigate whether the operating accrual anomaly (investor overreaction to the volatile accrual component of earnings) and the post-earnings announcement drift anomaly (investor underreaction to surprising earnings announcements) drive corporate buyback and personal trading decisions of company officers. These insiders are best positioned to detect the emergence of such anomalies. Using data for the NYSE and AMEX over the period 1989-2001, they find that: Keep Reading

Dumb Individual Investors and Smart Companies?

In their April 2005 paper entitled “Dumb money: Mutual Fund Flows and the Cross-section of Stock Returns”, Andrea Frazzini and Owen Lamont tackle a range of analyses tied to mutual fund inflows and outflows to determine whether or not these flows represent rational behavior on the part of individual investors. Do the flows predict abnormal returns for the underlying stocks? What do they mean for the wealth of the individuals causing them? By studying flows associated with domestic mutual funds from 1980 to 2003, they find that: Keep Reading

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