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Repurchases, Issuances and Earnings Surprises

Posted in Buybacks-Secondaries

Can investors exploit stock repurchase and issuance activity to predict market reaction to the next firm earnings release? In the May 2015 version of their paper entitled “Are Earnings Predictable?”, Shahram Amini and Vijay Singal test whether firm executives take advantage of superior information to time repurchases (issuances) of stock just before unexpectedly good (bad) earnings announcements. They focus on firms announcing repurchases of at least 5% and prices for sales of at least 10% of outstanding shares within 16 to 30 trading days before or after earnings releases. Using stock prices for 891 (1,072) repurchase announcements and 1,415 (1,604) issuance price announcements within 16 to 30 days before (after) earnings releases during 1987 through 2013, they find that:

  • Consistent with prior research, the average stock return from announcement day through the next 15 trading days is 4.8% (2.1%) after repurchase announcements (issuance pricing announcements). The corresponding four-factor alpha (accounting for market, size, book-to-market and momentum factors) is a significant 3.9% (-1.8%).
  • For earnings releases within 16 to 30 days before (after) repurchase announcements:
    • The average stock return from release day through the next 15 trading days is -3.8% (+4.0%), corresponding to a four-factor alpha of -3.0% (+2.5%).
    • Results suggest that earnings releases before repurchase announcements tend to be surprisingly bad (depressing stock price), and those after surprisingly good.
  • For earnings releases within 16 to 30 days before (after) issuance pricing announcements:
    • The average stock return from release day through the next 15 trading days is +2.6% (+0.5%), corresponding to a four-factor alpha of -2.1% (-3.1%).
    • Results suggest that earnings releases before issuance pricing announcements tend to be relatively good (supporting stock price), and those after relatively bad.
  • Results are somewhat weaker for: firms announcing smaller repurchases and issuance pricings; larger firms; and, a subsample since 2000.

In summary, evidence provides support for belief that firm executives time stock repurchase (issuance pricing) announcements such that the market finds the next earnings release surprisingly good (bad).

Cautions regarding findings include:

  • Reported returns are gross, not net. Including the costs of trading to exploit findings would reduce these returns.
  • Capturing earnings release day returns is problematic because of gap up or down stock price responses.
  • Opportunities (earnings announcements) may cluster, limiting exploitation.
  • Results suggest that exploiting responses to earnings after issuance pricing announcements is more difficult than after repurchase announcement.
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