Does Prior Record Matter in the Wealth Effect of Open-Market Share Repurchase Announcement?

1. Does Prior Record Matter in the Wealth Effect of Open-Market Share Repurchase Announcement? Shao-Chi Chang National Cheng Kung University, Taiwan Sheng-Syan Chen National Taiwan University, Taiwan Li-Yu Chen National Cheng Kung University, Taiwan

2. Main Idea ◆Not required to publicly disclose for open-market share repurchasing firms ◆ The amount of actual share repurchase ◆ Actual share repurchase ◆ Wealth effect ◆ Stock performance Prior experience Announcing date

3. Motivation (1/2) • Positive wealth effect of share buybacks (Vermaelen, 1981; Comment and Jarrel, 1991; Nohel and Tarhan, 1998; Stephens and Weisbach, 1998) • undervaluation • redistribution of excess cash flow • capital structure changes • takeover attempts deterrence • The amount of actual repurchases • achieving above goals • managerial motives of share repurchase

4. Motivation (2/2) • No actual completion of the repurchase program • only 20% of their buyback programs following their announcements (Fortune, 1995) • no acquisitions of shares made by most of the announcing firms in the 3 years following the announcements of repurchase programs (Stephens and Weisbach, 1998) • The evidence of incomplete actual repurchases • difficult to achieve above goals

5. Motives for failure of complete buyback • Boosting share price without the intention of actual completion (Wall Street Journal ,1995) • Increase in earnings-per-shares by reducing total shares outstanding (Bens, Nagar, Skinner and Wong, 2003) • improvement of stock performance • The amount of actual repurchases Sorting managers into those that signal truthfully and those that signal falsely

6. 1st Purpose ◆ Actual share repurchase ◆ Wealth effect Prior experience Announcing date

7. Main Idea ◆ Actual share repurchase ◆ Wealth effect ◆ Stock performance Prior experience Announcing date

8. Motivation • Undervaluation as the most cited reason for share repurchases (Ofer and Thakeor, 1987; Comment and Jarrel, 1991; Stephens and Weisbach, 1998; Ikenberry, Lakonishok, and Vermaelen, 2000) • An average buy-and-hold yearly return of 26.2% following the announcement date (Chan, Ikenberry and Lee, 2004) • Not meeting market expectation • no improvement of stock price • managers’ intentionally sending incorrect signals • their optimistically biased toward the intrinsic equity value

9. 2nd Purpose ◆ Stock performance ◆ Wealth effect Prior experience Announcing date

10. Data • The announcements from Securities Data Corporation (SDC) during 1986 to 2005 • Criteria • at least two repurchase announcements during the sample period • return data available on the Center for Research in Security Prices (CRSP) database • financial information available from Compustat database • Sample Distribution- Table 1

11. Table 1-Sample Distribution (1/2)

12. Table 1-Sample Distribution (2/2)

13. Sample Selection Total initial sample 5,717 First announcement (-)1,741 Missing control variables (-) 815 Consecutive announcements <one year (-)1,403 Final sample 1,758

14. Methodology (1/2) • Measuring Abnormal Stock Return • Standard event-study methods • Table 2 • Measuring Reacquired Shares (Stephens and Weisbach, 1998) • Changes in outstanding common shares, dollars spent on requiring shares, and the value increase of treasury stocks • Scaling each measure of actual repurchase by the total number of shares outstanding at the time of announcement

15. Methodology (2/2) 1. Monthly decreases in the firm’s shares outstanding from CRSP cumulated quarterly 2. Quarterly decreases in the firm’s shares outstanding from Compustat 3. Dollars spent on reacquiring securities / the minimum share price in a given quarter 4. Dollars spent on reacquiring securities / the average share price in a given quarter 5. Quarterly increases in the dollar value of the firm’s treasury stock / the minimum share price in a given quarter 6. Quarterly increases in the dollar value of the firm’s treasury stock / the average share price in a given quarter

16. Empirical Results (1/5) • Abnormal Returns Classified by the Actual Share Repurchases • Table 3 - Panel A • Abnormal Returns Classified by Market- Adjusted Buy-and-Hold Return • Table 3-Panel B Learning from prior evidence of share repurchase • Cross-Sectional Regression Analyses of the Announcement Period Returns • Table 4

17. Empirical Results (2/5) • Robustness of the results • scaling actual repurchase by the number of shares to be repurchased in announced program • different event windows of cumulated abnormal returns (CAR (0, 1) , CAR (-1, 2) & CAR (2, 2) ) • different period of cumulative repurchases over the half year, one and half years and over the entire two years • different intervals in measuring the market-adjusted BHR or raw BHR (6-month & 9-month) • consecutive announcements made morethan one and half years

18. Empirical Results (3/5) • The earnings forecast revision of financial analysts • valuable information of investors’ expectation on the prospects of future cash flow (Givoly and Lakonishok, 1979; Fried and Givoly, 1982) • improving our understanding of stock market reactions (Brous and Kini, 1993) • Cross –Sectional Regression of Analyst’s Adjusted Forecast Revisions • Table 5

19. The difference between the current and prior actual share repurchases Current High actual buy Current Low actual buy Prior High actual buy + Prior Low actual buy Long-horizon abnormal return of following share repurchases announcement Empirical Results (4/5) • Actual share buyback and long-run return • Conditions the market to expect large current actual share repurchases • Loss of reputation • Surprising expectation A Group B Group

20. Empirical Results (5/5) • Robustness Check • actual share repurchases obtained from Compustat databases • no other share repurchases announcing firms in the four years after the announcing date • long-run return from second year to fourth year • consecutive announcements made more than one and half years

21. Conclusions ◆ Short-term and long-term earnings forecasts ◆ Short-term and long-term earnings forecasts ◆ Actual share repurchase ◆ Wealth effect ◆ Wealth effect ◆ Stock performance ◆ Long-run return Prior experience Announcing date Simultaneously consider the current and prior actual share repurchases into their long-term returns • Investors will learn from past experience about share repurchase announcements

22. Contributions • To explore the relationship between prior evidence of share repurchase and the wealth effect on the following share repurchase announcements • to test the above mentioned relationship

23. Thank you for your Attentions!

24. Table 2-Abnormal Returns

25. Table 3-Abnormal Returns Classified by the Actual Share Repurchases

26. Table 3-Abnormal Returns Classified by Market-adjusted BHR quintiles

27. Variables’ Definitions Undervaluation Redistribution of excess cash flow Capital structure changes Takeover attempts deterrence

28. Table 4- Regression Analyses of the Announcement Period Returns

29. Analyst’ Earnings Forecast Revisions • Brous (1992) and Brous and Kini (1993) • analysts’ forecast revision on the current-year earnings per share • Yoon and Starks (1995) • analysts’ forecasts of long-term earnings growth

30. Table 5- Analyst’s Adjusted Forecast Revisions of Current-year Earnings Per Share

31. Table 6- Analyst’s Adjusted Forecast Revisions of Long-term Earnings Growth

32. Definition of Variables

33. Table7-Cross-Sectional Regression Analyses of the Long-run Stock Returns of Shares Repurchases