Information and Long‐Term Stock Performance Following Open‐Market Share Repurchases

AuthorGregory Noronha,Fei Leng
Date01 August 2013
Published date01 August 2013
The Financial Review 48 (2013) 461–487
Information and Long-Term Stock
Performance Following Open-Market
Share Repurchases
Fei Leng
University of WashingtonTacoma
Gregory Noronha
University of WashingtonTacoma
We find that firm managers have private information when they decide on open-
market share repurchases, and that this information is significantly correlated with announce-
ment period and post-announcement abnormal returns. We further find that long-term post-
announcement abnormal returns are related to private information differently for firms that
actually repurchase shares when compared to firms that announce a repurchase program but do
not acquire shares. Our results indicate that managers’ privateinformation is only ambiguously
revealed by the repurchase announcement, and that the market waits for the firm’ssubsequent
actions, such as actual repurchase, to further interpret the private information.
JEL Classifications: G14, G35
Corresponding author: Universityof Washington Tacoma, Milgard School of Business, 1900 Commerce
St., Tacoma, WA 98402-3100; Phone: (253) 692-5628; Fax: (253) 692-4523; E-mail:
The authors are grateful for helpful comments from William McNally and two anonymous referees of the
journal. They also thank participants at the 2011 Northern Finance Association and Financial Management
Association annual meetings for their comments and suggestions.
C2013, The Eastern Finance Association 461
462 F.Leng and G. Noronha/The Financial Review 48 (2013) 461–487
1. Introduction
There has been a rapid rise in both the number of open-market share repurchases
and the dollar amount of shares repurchased in the last three decades (Grullon and
Michaely, 2002; Kooli and L’Her, 2010). One significant reason for these repur-
chases can be management’s perception that their stock is undervalued. For example,
following a survey of firm managers, Brav, Graham, Harvey and Michaely (2005)
find that corporate executives are motivated to repurchase shares in response to their
perceived market undervaluation of their stock. Empirical evidence also indicates
that the market regards repurchase announcements as good news (Vermaelen, 1981;
Bartov, 1991; Comment and Jarrell, 1991). Several researchers, including Ikenberry,
Lakonishok and Vermaelen (1995, 2000) and Akhigbe, Kim and Madura (2007),
report that repurchases, on average, result in favorable long-term returns for the firms
announcing them.
If perceived undervaluation is indeed a driver of repurchase announcements,
an important related question is whether that perception results from management’s
privately held information. Existing research is unclear about the issue. Lie (2005)
provides evidence of earnings improvement following open-market repurchase an-
nouncements. Gong, Louis and Sun (2008) show that management manipulates earn-
ings downward prior to repurchase announcements. These researchers do not explic-
itly address the issue of the existence of private information, although their studies
imply that managers possess superior information when they make open-market re-
purchase decisions, regardless of whether this informational advantage results from
true knowledge or managerial manipulation. More recently, Peyer and Vermaelen
(2009) emphasize the role of public information in managers’ repurchase decision
and maintain that it is managers’ disagreement with analysts’ assessment of public
information that motivates the repurchase.
In our study,we provide direct evidence on the issue of management’s private in-
formation in open-market repurchases. Specifically,we address two interrelated ques-
tions: whether there is private information at all, and if present, howthe market assim-
ilates the private information. This second issue is particularly interesting because it
is not adequately addressed in existing repurchase signaling research, which typically
considers repurchase as a managerial signal of share undervaluation. In the study of
repurchase related signaling, prior researchers (e.g., Vermaelen,1981; Isagawa, 2000)
focus their attention on the repurchase announcement and thus treat the announcement
as a single, isolated signal. A potential difficulty with the single-signal approach is
that, if markets are efficient, it is unable to explain the persistent post-announcement
price drift evident in the empirical research (Ikenberry, Lakonishok and Vermaelen
1995, 2000; Peyer and Vermaelen, 2009). Market underreaction is the commonly
used explanation for this prolonged assimilation of the announcement signal, but
what causes the underreaction in share repurchases has not yet been fully explored.1
1Thus far, the clearest explanation of underreaction in open-market share repurchase comes from Peyer
and Vermaelen (2009). They argue that analysts are, on average, overly pessimistic about repurchase

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