Operating performance and long‐run stock returns following share repurchase: Evidence from an emerging market

• Date: 01 July 2020
• Author: Ngoc Dinh,Cuong Nguyen,Huabing Barbara Wang
• DOI: http://doi.org/10.1002/jcaf.22450
• Published date: 01 July 2020

BLIND PEER REVIEW

Operating performance and long-run stock returns

following share repurchase: Evidence from an

emerging market

Huabing Barbara Wang

1

| Cuong Nguyen

1

| Ngoc Dinh

2

1

Engler College of Business, West Texas

A&M University, Canyon, Texas

2

Faculty of Finance, University of

Economics, the University of Danang,

Danang, Vietnam

Correspondence

Huabing Barbara Wang, Engler College of

Business, West Texas A&M University,

Canyon, TX 79016.

Email: hwang@wtamu.edu

Abstract

This study examines the long-term abnormal returns and operating performance

following share repurchase announcements by Vietnamese listed firms. Applying

matched control samples based on industry, exchange listing, size plus book-to-

market, and pre-event operating performance, we document significantly higher

post-repurchase buy-and-hold abnormal returns over the one-ye ar window. The

outperformance becomes insignificant for most control samples with a longer

horizon of 2 years after controlling for common pricing factors. Regarding operat-

ing performance, our results show improvement for repurchasing firms in the fis-

cal year concurrent with the repurchase announcements when we adopt the

control sample based on pre-event performance, but we do not find significant dif-

ferences for the subsequent fiscal year. Examining the relation between the dual

phenomena, we find some evidence of positive association in that firms with bet-

ter post-repurchase performance tend to have higher post-event abnormal returns.

This relation is stronger for firms with higher completion rates, consistent with

the notion that actual repurchase is a stronger and more credible signal to the

market.

KEYWORDS

emerging market, long-term event study, operating performance, signaling, stock repurchase

1|INTRODUCTION

Prior literature documents both superior long-horizon

stock returns and better operating performance

for repurchasing firms, suggesting that the post-

repurchase anomaly might be, at least partially, attrib-

utable to the concurrent enhancement in the firm's

operating performance (e.g., Chan, Ikenberry, &

Lee, 2004; Lie, 2005). This article examines this rela-

tion with a sample of Vietnamese listed firms, shed-

ding light on the post-repurchase phenomena in an

emerging economy. The Vietnamese stock market is

relatively young, less liquid, and less efficient with

trading activities dominated by unsophisticated investors

(e.g., Loc, Lanjouw, & Lensink, 2010; Nguyen, Tran, &

Zeckhauser, 2017; Tran, Hoang, & Tran, 2018; Vo, 2016).

Meanwhile, probably in response to these market fea-

tures, the Vietnamese regulation requires more transpar-

ency in repurchase disclosure. Vietnamese firms are

required to publicly and timely disclose not only when

they intend to buy back their shares, but also when they

decide to end the repurchase program approximately

3 months after the initial announcement for our sample.

In the market and regulatory setting of Vietnam, we

utilize share repurchases over the sample period

2008–2016 to empirically examine the co-occurrence of

Received: 22 November 2019 Revised: 20 April 2020 Accepted: 11 May 2020

DOI: 10.1002/jcaf.22450

32 © 2020 Wiley Periodicals, Inc. J Corp Acct Fin. 2020;31:32–47.wileyonlinelibrary.com/journal/jcaf

post-repurchase abnormal stock returns and accounting

performances as well as their relation. We adopt matching

control samples based on industry, exchange listing, size

and book-to-market (B/M), and pre-event operating per-

formance, and investigate the issues in a fixed-effect panel

setting. We document significantly higher buy-and-hold

abnormal retur ns (BHARs) over th e 1-year period f ollow-

ing the repurchase announcements for the event firms

than for the matching control firms based on multiple

criteria. However, when we extend the event window to

2 years, the significant outperformance does not seem to

be as robust across different matching methods. It is only

significant for the industry-exchange-size-B/M matched

sample in univariate tests. However, when we add control

variables for additional differences in firm size, B/M, and

prior stock returns in a fixed-effect multivariate regression,

we do not find the event firms to be associatedwith signifi-

cantly higher returns for the same sample group. There-

fore, it appears that the superior returns are not as long-

lasting in Vietnam as documented in other countries

(e.g., Peyer & Vermaelen, 2009).

Second, we investigate post-repurchase operating per-

formance, documenting improved operating performance

for the repurchasing firms with the control sample mat-

ched on industry, exchange, and pre-event performance.

However, the improvement is only for the fiscal year con-

current with the repurchase announcements. The fiscal

year that follows does not seem to experience significant

improvement according to our empirical tests. This result

suggests that the signal sent out by repurchase announce-

ments in Vietnam may not contain longer-term informa-

tion, corresponding to our lack of robust findings for the

2-year buy-and-hold abnormal returns. In addition, with

the control sample by other matching criteria, we do not

find any significant differences in post-repurchase operat-

ing performance for the event firms.

We further examine the relationship between the

superior abnormal returns and operating performance,

expecting the improved operating performance to partially

reflect the superior abnormal stock returns. We find some

evidence that event firms with higher concurrent operating

performances also enjoy higher BHARs over the 1-year win-

dow, but the results are quite sensitive to the operating per-

formance measure and the control groups. We further

examine the role of completion in this relation hypothesiz-

ing that firms with higher completion rates have a stronger

relationship in the dual phenomena, and find consistent

results: Firms with a simultaneously higher completion rate

and higher operating performance appear to have signifi-

cantly higher 1-year BHARs.

This article contributes to the literature in two ways.

First, we provide the out-of-sample evidence on the co-

occurrence of superior long-term BHARs and operating

performance improvement in Vietnam, an emerging econ-

omy with less efficient stock markets but more transparent

disclosing requirements regarding share repurchases. Sec-

ond, given that the share buyback announcement is not a

binding commitment, our results lend support to the impor-

tance of actual repurchase as a credible signal to the market.

Because of the Vietnamese disclosure rules requiring a pub-

lic announcement of completion even when a firm fails to

repurchase any shares, we are able to directly calculate the

actual completion rate for each repurchase program in our

sample. In the previous studies of many countries including

the US, however, researchers need to infer the completion

rate for two reasons. First, many countries do not require

the disclosure of the actual number of shares repurchased.

In the US, it is not until 2004 when firms are mandated to

disclose actual repurchase activities quarterly with the

amendment to Exchange Act Rule 10b-18 (e.g., see

Bozanic, 2010; Cook, Krigman, & Leach, 2004). More

importantly, most countries including the US do not have a

requirement for a definite conclusion of the repurchase pro-

gram once announced. As reported in Stephens and

Weisbach (1998), a repurchase program can last multiple

years in the US Our results suggest that the actual comple-

tion rate contains meaningful information that can be uti-

lized by market participants. It is, therefore, possible to

achieve increased transparency in repurchase disclosure and

regulation by either limiting the length of a repurchase pro-

gram or mandating the firms to disclose the conclusion of a

repurchase program.

2|LITERATURE REVIEW

AND HYPOTHESIS DEVELOPMENT

2.1 |Long-run abnormal returns

following share repurchases

According to the signaling theory of payout

(Bhattacharya, 1979; Miller & Rock, 1985; Vermaelen, 1981;

Vermaelen, 1984), firms utilize share repurchase as a credible

vehicle to convey favorable information to the market. Prior

literature has found that this signal is well accepted, trigger-

ing immediate market reactions (Bonaimé, 2012; Grullon &

Michaely, 2002; Ikenberry, Lakonishok, & Vermaelen, 1995;

Manconi, Peyer, & Vermaelen, 2019). Additionally,

researchers find that the immediate reactions appear to be

incomplete as they document long-horizon abnormal

returns over multiple years following the announcements, a

phenomenon often referred to as the long-term drifts.

Lakonishok and Vermaelen (1990) document eco-

nomically and statistically significant abnormal returns

in the 2-year period following tender offers, a special

form of share buyback where firms make the solicitation

WANG ET AL.33