Can managers time the market?
Evidence using repurchase price data
Amy Dittmar
University of Michigan
Laura Field
Pennsylvania State University
Little is known about the prices firms pay for repurchases. We compile a U.S. dataset of
actual repurchase prices paid, and we compare that price to the average market price. We
find that firms repurchase at significant lower prices than the market average. Firms'
ability to time the market varies cross-sectionally: less frequent repurchasers obtain
significantly lower prices, as do firms repurchasing when insiders buy on their own
account. Also, market timing ability is greater in the face of higher information
asymmetry. Controlling for market risk factors, we find that managers' ability to time is
limited to short investment horizons.
*
We appreciate helpful comments from Malcolm Baker, Robert Dittmar and Michelle Lowry. We thank
Anahit Mkrtchyan and Jason Kotter for research assistant. Contact the authors at: Amy Dittmar, The Ross
School of Business, University of Michigan, Ann Arbor, MI 48109, [email protected]; and Laura Field,
Smeal College of Business, Penn State University, University Park, PA, 16802 , [email protected].
Abstract
Little is known about the prices firms pay for repurchases. We compile a U.S. dataset of actual
repurchase prices paid, and we compare that price to the average market price. We find that firms
repurchase at significant lower prices than the market average. Firms' ability to time the market
varies cross-sectionally: less frequent repurchasers obtain significantly lower prices, as do firms
repurchasing when insiders buy on their own account. Also, market timing ability is greater in
the face of higher information asymmetry. Controlling for market risk factors, we find that
managers' ability to time is limited to short investment horizons.
1. Introduction
Can managers time the market in making security issuance and repurchasing decisions?
This question has spurred many studies in both the security issuance and repurchases literatures.
Despite numerous investigations, it remains unclear if the evidence supports or disputes the
market timing hypothesis. 1 One of the reasons that it is difficult to determine whether managers
can time the market is that much of this literature relies on long-run returns after the event to
determine whether a manager is timing the market [Laknoishok and Vermaelen (1990, Ikenberry,
Laknoishok and Vermaelen (1995 and 2000) and Peyer and Vermaelen (2008)]. 2 In the case of
stock repurchases, this is particularly problematic because the returns are measured after
announcement of a repurchase program, yet many firms announce but never actually repurchase
stock [Stephens and Weisbach (1998)]. Other studies based on large scale U.S. data on actual
repurchases show that firms repurchase after a stock price run-down [Jagannathan, Stephens, and
Wesibach (2000)], but this analysis is based on annual or perhaps quarterly data on amount of
(but not the price paid for) stock repurchased. Further, several studies provide evidence that
firms repurchase for reasons other than undervaluation [Dittmar (2000), Grullon and Michaely
(2002), Jagannathan, Stephens, and Wesibach (2000), Kahle (2002), Bens, Nagar, Skinner
(2003), Massa, Rehman, Vermaelen (2007)]. Understanding managers’ ability to repurchase
undervalued stock is vital to being able to reconcile the academic studies of repurchases with the
1
Baker and Wurgler (2000 and 2002), Ikenberry Laknoshok and Vermaelen (1995 2000), and Peyer and Vermaelen
(2009) present evidence consistent with market timing and Eckbo, Masulis, and Norli (2000), Schultz(2003), Butler,
Grullon, and Weston (2005), and Dittmar and Dittmar (2007) dispute the interpretation of these findings as evidence
of market timing.
2
The evidence based on operating performance is similar to the long run returns but more inconclusive. Lie (2005)
shows that firms report significant improvement in operating profitability following a repurchase announcement and
Gong, Louis, and Sun (2008) show that this is at least in part due to pre-repurchase announcement downward
earnings management rather than growth in profits.
1
fact that CFOs list undervaluation as the primary factor driving the motive to repurchase [Brav,
Graham, Harvey and Michaely (2005)].
In this paper, we employ new, monthly data that indicates actual firm repurchases and the
average price paid for the stock to examine whether firms are able to time the market with
repurchases. By utilizing these data, we are able to speak to both the ability of firms to time the
market and the cross-sectional dispersion in a firm’s ability to repurchase at a low and possibly
undervalued price. Our sample consists of 1,243 firms that repurchase stock as part of a stock
repurchase program in a total of 15,866 firm-months between 2004 and 2006 and is an
exhaustive list of stock repurchased within a program over this period.
By knowing the actual average repurchase price, we are able to measure market timing.
We create a variable comparing the average monthly repurchase price (available from the notes
in financial statements) to the average of closing prices from CRSP for the same stock over the
month of the repurchase, as well as at one-, three-, and six-month windows before and after the
repurchase month. Throughout the paper, we refer to this variable as the Relative Repurchase
Pricet, where t notes the number of comparison months before and after the repurchase. We
predict that if firms can time the market, this measure should be significantly less than zero.
Indeed, we find that the relative repurchase price is, on average, significantly less than zero: the
average firm repurchases stock at a price significantly lower than the average closing price over
the month of the repurchase, as well as over the periods of one, three, and six months before and
after the repurchase.
In addition to examining the repurchase price, we observe detailed information on the
amount and timing of repurchase activity over a monthly window, which is much narrower than
is used in other U.S. studies. We find that the frequency of repurchase activity varies
considerably, with 20% of firms repurchasing stock in at least nine months of a calendar year.
2
Further, frequent and infrequent repurchasers differ significantly in several ways: frequent
repurchasers are significant larger and more profitable and have significantly more cash and
higher dividend payouts. Moreover, though the fraction of stock repurchased in one month is
smaller for frequent repurchasers, frequent repurchasers account for over 65% of aggregate
repurchases over this sample period. These differences suggest that the motives for repurchasing
(and the potential role of market timing) may differ for frequent and infrequent repurchasers.
We next examine how the frequency of repurchases impacts managers’ ability to time the
market. In addition to providing insights into the cross-sectional ability to time the market, this
analysis also provides insights into the duration a firm may remain undervalued. One
fundamental concern often levied at the long-run performance analysis of market timing is that it
presumes the misvaluations remain after both the announcement as well as several months after
initial repurchases, thus allowing firms a long window to repeatedly repurchase at low or
possibly undervalued prices.
We find that firms’ ability to time the market is decreasing in the frequency of repurchase
activity. That is, the relative repurchase price increases monotonically as the repurchasing
frequency increases. Further, the relative repurchase price is not significantly different from zero
for the most frequent repurchasers. This evidence suggests that frequent repurchasers are likely
repurchasing stock for reasons other than misvaluation. This result is particularly interesting
given that these firms repurchase the largest percentage of their market value and are the largest
firms in the sample, thus indicating that though some firms time the market, a large portion of
stock repurchases are done for other reasons. However, for all but the most frequent
repurchasers, we find that firms’ Relative Repruchase Prices are significantly negative,
suggesting that many firms do time the market with repurchases.
3
The evidence indicates that, on average, some managers are able to time the market and
repurchase at a relatively low price and that the degree of potential mispricing captured by the
firm varies based on the frequency of the repurchase. To further examine the cross-sectional
variation in firms’ abilities to time the market, we compare repurchase activity to insider trading
behavior over the same period. Seyhun (1986) provides evidence of managers’ ability to time the
market with their personal trades. Thus, similar to Jenter (2005), we use insider buying and
selling as an indicator that a firm is potentially misvalued. In doing so, we are able to confirm
whether the relative repurchase price is lower when a firm is more likely undervalued, as well as
to provide insight into which firms are able to time the market.
We find that repurchasing firms with relatively high insider buying during the repurchase
month have a negative relative repurchase price. This suggests that, for firms with substantial
insider buying during the repurchase month, repurchasing firms do so at significantly lower
prices than the average. This result is consistent with the findings of Bonaimé and Ryngaert
(2011). However, whereas Bonaimé and Ryngaert examine long run returns following the
quarter of a repurchase, we focus on the actual price paid in the repurchase.
We confirm these results in a multivariate analysis, controlling for firm characteristics.
Specifically, we regress the relative repurchase price on the variables discussed above, several
firm characteristics, and year and firm fixed effects. The results confirm the previously discussed
findings: firms are able to repurchase at a significantly lower price when they repurchase
infrequently and concurrently with insider buying. Further, this analysis reveals characteristics of
those firms that are able to time the market, thus providing insight into the cross-sectional
variation of the motives to repurchase. We show that firms that repurchase at a lower relative
price tend to be smaller firms with less cash and a lower market-to-book ratio. These results are
4
consistent with firms timing the market with stock repurchases when they are potentially
undervalued with less excess cash to distribute.
To better understand if firms are undervalued and what managers know about the price of
the firm when implementing a repurchase program, we next examine measures of information
asymmetry. Using the number of analysts and the dispersion of analyst forecasts as measures of
information asymmetry, we find evidence that more opaque firms are able to obtain a lower
repurchase price. To investigate this result further, we examine abnormal returns around
repurchase announcements. However, we find no evidence that, at announcement, investors can
predict which firms are undervalued.
One concern with our relative repurchase price measure may be that the comparison
period spans before, as well as after, the repurchase. We know from the previous literature that
firms repurchase after a stock price run-down [Jagannathan, Stephens and Weisbach (2000)].
Clearly, to truly time the market firms would repurchase at a low price relative to future prices as
well. We repeat our analysis using a forward-looking relative repurchase price, which compares
the repurchase price to the months during and following the repurchase. We find that, generally,
our results are robust to using post-repurchase windows: infrequent repurchasers, those with net
insider buying, and those with more information asymmetry are best able to time the market with
repurchases.
Finally, we examine post-repurchase returns by calculating the alpha from a Fama-French
regression to control for market risk, and examine this return over the several investment
horizons. The results are insightful. In both the full sample and in sub-samples where earlier tests
found evidence of market timing, we confirm that managers earn superior returns after
controlling for risk factors. However, these superior returns hold only on short investment
horizons of three to six months. Thus, this paper provides evidence that over short horizons,
5
managers time stock repurchases when they repurchase infrequently and when their repurchases
coincide with insider buying. However, managers’ forward insight into prices is limited to a
relatively short window.
This paper contributes to a vast literature on stock repurchases and the ability of firms to
time the market when they repurchase stock. The papers most similar to this paper are Brockman
and Chung (2001) and Cook, Krigman, and Leach (2004). Brockman and Chung examine the
timing ability of approximately 190 repurchasing firms in Hong Kong. Cook, Krigman, and
Leach pursue a similar research agenda using 64 U.S. firms repurchase trading data. Both papers
find that, on average, managers are able to time the market. However, Brockman and Chung find
that approximately half the managers are able to beat a naïve investment strategy and that their
repurchases impact trading behavior, while Cook, Krigman and Leach find little cross-sectional
variation in the ability to time the market or an impact on trading. As explained in Cook et al.,
the conflicting evidence in these two studies illustrates the important differences in the U.S. and
Hong Kong regulatory environments for repurchases. Further, Ikenberry, Lakonishok, and
Vermaelen (2000) examine monthly repurchases for firms in Canada using monthly repurchase
volume but not price data. Our paper extends prior research by examining a full sample of all
U.S. repurchasing firms, thus allowing a more complete analysis and a greater ability to examine
cross-sectional variation in timing.
In section 2, we describe the sample and data collection. Section 3 discusses and presents
evidence on the relative repurchase price. In section 4, we examine our results in a multivariate
setting and the cross-sectional variation in timing. In section 5, we examine forward-looking
measures of the relative repurchase price. Section 6 reports Fama-French regressions, controlling
for market risk factors, to further examine timing ability. Section 7 concludes the paper.
6
2. Data and methodology
In 2003, the SEC amended Exchange Act Rule 10b-18, requiring companies to disclose
all repurchases in their annual and quarterly reports as of March 15, 2004. As a result, at the end
of each fiscal quarter, firms are now required to disclose the number of shares repurchased each
month, whether these shares were repurchased as part of a public plan, and the average price paid
for repurchases over the month. We utilize these data to speak both to the ability of firms to time
the market and the cross-sectional dispersion in firms’ ability to repurchase at a low and possibly
undervalued price. 3
To construct our sample, we utilize PERL to search 10-K and 10-Q filings on EDGAR to
identify firms conducting repurchases between 2004-2006. To ensure we have captured all
repurchases, we also use the purchases of stock variable from the Statement of Cash Flows to
identify repurchasing firms over the period. For any firms not identified in the PERL search but
identified by Compustat as having purchased stock, we manually search all 10-K and 10-Q
filings on EDGAR to collect data on the amount and price of repurchases. Using both methods,
we identify 1,243 firms that have repurchased at least once during 2004-2006 as part of a
publicly-announced program. Our final sample includes these 1,243 firms, encompassing 43,051
firm-months, of which 15,866 are firm-months with repurchases.
Table 1 provides summary statistics for the sample. As shown in the table, the frequency
of repurchase activity varies considerably in any given year. About half of firms repurchase
infrequently, fewer than five times during the year. Perhaps more surprisingly, about 20% of
repurchasing firms repurchase quite frequently – at least nine times a year. Over the sample
3
Though Banyi, Dyl, and Kahle (2008) provide summary statistics of the amount repurchased by a random sample
of 520 firms in 2004 using these data (to determine the accuracy of previously used measures of the quantity of
stock repurchased), no other paper utilizes data on both the amount and price of a full sample repurchasing firms
over multiple years.
7
period, frequent repurchasers account for 65.6% of the aggregate dollar value of repurchases,
compared to 23.6% for the moderate and 10.8% for the infrequent repurchasers.
Table 2 presents summary statistics of accounting characteristics for the full sample and
for subsamples, based upon repurchase frequency. Frequent and infrequent repurchasers differ
significantly on many dimensions. Frequent repurchasers are significantly larger and more
profitable and have significantly more cash and higher dividend payouts than infrequent
repurchasers. Also, although the percent of stock repurchased monthly is smaller for frequent
repurchasers, frequent repurchasers tend to repurchase more over the entire year (although the
difference in annual repurchases is only significant for the median). Specifically, although the
median frequent repurchaser’s monthly repurchase is only 0.29% of market value (compared to
0.40% for infrequent repurchasers), the median frequent repurchaser repurchases 4.21% of the
firm’s market value on an annual basis (compared to 1.08% for infrequent repurchasers). These
differences suggest that the motives for repurchasing (and the potential role of market timing)
may differ for frequent and infrequent repurchasers. Before we investigate these differences, we
first examine the extent to which managers, on average, are able to time the market.
3. Relative repurchase price
Unlike prior research on repurchases by U.S. firms, which relies on long-run returns after
the announcement of the repurchase to determine if managers are timing the market, in this paper
we are able to observe and examine the average price paid for actual repurchases each month.
Thus, we are able to more directly measure whether managers are using repurchases to time the
market. To measure firms’ ability to time the market, we construct a measure that compares the
average price paid for repurchases during the month (as reported in the 10-Q and 10-K), R E P0 ,
to the average daily closing stock prices (from CRSP) over several comparison periods of t
8
months before and after the repurchase month, C Pt . If managers are not timing the market, we
would expect the average price paid by the firm to be insignificantly different from the average
CRSP price from the same month. Conversely, if a manager is able to time the market,
conditional on deciding to repurchase in a given month, we would expect the firm to pay a price
significantly lower than the average price a random investor may pay for the stock in that month
(that is, R E P0 < C Pt ). We measure market timing as the percentage difference between the
average price paid for repurchases, R E P0 , and the average CRSP closing price, C Pt , measured t
months surrounding the repurchase. We refer to this variable throughout the paper as the Relative
Repurchase Price:
Relative Repurchase Price t =
R E P0
−1
C Pt
(1)
where R E P0 is the repurchase price paid in the repurchase during the repurchase month and C Pt
is the comparison price measured during t months before and after the repurchase.
If firms can time the market, we posit that the relative repurchase price should be
significantly less than zero. Not only do managers choose when to repurchase in a given month,
but they also choose the period in which to implement the repurchase. Thus, we expect the
relative repurchase price to be negative for longer comparison periods as well as shorter ones.
We therefore estimate the relative repurchase price comparing the average repurchase price to
the average daily closing CRSP price during the repurchase month, as well over ±1, ±3 and ±6
month windows surrounding the repurchase month. If the manager is timing the market, we
expect he will not only buy at a low price relative to historical prices but also at a price lower
than his forecast of future prices. Thus, we compare the repurchase price to the price in the
months before and after the repurchase to gain insight into a manager’s ability to forecast the
9
future stock price and time the market. In later analysis, we also estimate this relative price using
forward-looking data only (that is, excluding pre-repurchase months).
Table 3 provides summary statistics on the mean (median) relative repurchase price for
the month of repurchase, as well as windows of one, three, and six months surrounding the
repurchase, for the full sample and for each sample year. We find that the average and median
relative repurchase prices are significantly negative in all sample years, thus indicating that the
average (median) firm is able to time the market. On average, firms repurchase at a price that is
0.67% lower than the average daily closing price for that firm during the same month. Moreover,
we find that the relative repurchase price is significantly negative for all three comparison
periods we examine, suggesting that managers not only time the days within a short window in
which they repurchase, but they also choose to repurchase when the price is low relative to the
price over longer horizons (of up to six months). Indeed, the relative repurchase price is lower
the longer the window we examine: the average firm is able to repurchase at a price that is
1.01%, 1.57%, and 2.01% lower in the one-, three-, and six-month periods surrounding the
repurchase month. Given that the average firm repurchases 4.23% of its market value over a
calendar year, the 2.01% repurchase discount using a six-month window represents a substantial
gain to the firm. Indeed, the average repurchase discount amounts to $810,291 per firm-year, or
an average discount of $1,745,772 per repurchasing firm over our three-year sample period.
Clearly, the ability to time repurchases potentially provides substantial savings to firms.
We conjecture that repurchase frequency may affect a manager’s ability to time the
market. Specifically, firms that repurchase once a year have more flexibility in terms of timing
than do firms that repurchase monthly. As shown earlier in Table 1, 20% of sample firms
repurchase frequently (at least nine months in the year). Thus, we next examine how the
frequency of repurchases impacts a manager’s ability to time to the market. Table 4 presents the
10
mean and median relative repurchase price by repurchasing frequency to examine whether there
is a relation between firms’ ability to time the market and how often firms conduct repurchases.
We find that, for all windows, both the average and median repurchase price is monotonically
decreasing in repurchase frequency. For example, using the repurchasing month as the window
of comparison, firms that repurchase only once during the year have an average (median) relative
repurchase price of -1.62% (-1.03%), compared to only -0.15% (-0.05%) for firms repurchasing
monthly. For the six month window surrounding the repurchase month, we find that firms
repurchasing just once during the year have an average (median) repurchase price of -5.03%
(-4.81%) compared to an insignificant -0.05% (-0.11%) for monthly repurchasers. In fact, we
find that monthly repurchasers’ mean and median relative repurchase prices are not significantly
different from zero for either the three or six month window. Further, as shown in the bottom
panel, the difference between the Repurchase Repurchase Price for frequent and infrequent
repurchasers increases monotonically as the measurement window increases.
This evidence demonstrates that many firms time the market when repurchasing stock,
particularly those that repurchase infrequently. In the next section, we model the relative
repurchase price in a multivariate setting, in which we control for firm characteristics.
4. Cross-sectional variation in the relative repurchase price
We next utilize a multivariate setting to control for firm characteristics. Specifically, in
Table 5, we regress the relative repurchase price on repurchase frequency and several firm
characteristics, as well as including year and firm fixed effects. In the regressions shown in
Table 5, the dependent variable is the relative repurchase price, measured over ±1, ±3 and ±6
months of the repurchase, respectively. We include two variables to capture repurchase
frequency: “infrequent repurchase” is an indicator variable equal to one for firms that repurchase
11
1-4 times a year, and “frequent repurchase” is an indicator variable equal to one for firms that
repurchase at least nine times a year.
Focusing on repurchase frequency, regardless of the event window we estimate over, we
find that infrequent repurchasers obtain a significantly lower relative repurchase price, consistent
with the univariate results in Table 4. For the ±3 and ±6 month windows, we also find that larger
firms with higher market to book ratios pay a higher relative repurchase price, indicating these
firms are less likely to be timing the market. The results for ±6 months also show that firms with
more cash and lower return on assets pay higher relative prices. For the shorter ±1 month
window, the coefficient on market to book is negative and significant, indicating that low market
to book firms pay higher relative repurchase prices. Given the opposing results on M/B for the
one month versus three and six month windows, we are cautious in our interpretation of the
relation between market-to-book and relative repurchase price. Overall, the results in Table 5
suggest that infrequent repurchasers time the market, while frequent repurchasers have
alternative motives to repurchase other than misvaluation. Given that both the univariate and
multivariate evidence suggests that many firms are able to time the market, a natural question is,
“If managers can time the market, do they do so on their own account?” Thus, we next turn our
attention to the relation between the relative repurchase price and the prices at which insiders
purchase shares on their own account.
4.1. Insider trading activity
To further examine the cross-sectional variation in firms’ ability to time the market, we
examine insider trading behavior for firms repurchasing during the same time period. Seyhun
(1986) provides evidence of managers’ ability to time the market with their personal trades.
Thus, similar to Jenter (2005), we use insider buying (selling) as an indicator that a firm is
12
potentially misvalued. In doing so, we are able to confirm whether our relative repurchase price
measure is lower when insiders view the firm as undervalued, providing further insight into
whether firms are able to time the market.
Information on insider trading is obtained from The Insider Filing Data Feed, available
through Thomson Reuters. This database captures all U.S. insider trading activity as reported on
Forms 3, 4, 5 and 144. For our full sample of 1,243 firms with 15,866 repurchases during the
2004-2006 period, we search for insider trades occurring in the same month. We find 7,129
repurchase months where insiders are also trading. In Table 6, we divide our sample firms into
quartiles based on the net insider buying over the same period that the relative repurchase price is
measured. That is, we measure net insider buying as insider buys minus insider sells for each
month, scaled by shares outstanding at the end of the prior period. We then sort firms into
quartiles based upon this net insider buying measure. 4 For each quartile of insider buying, we
summarize the relative repurchase price paid by the firm.
As shown in Table 6, for all insider trading quartiles, firms repurchase at significantly
less than the average CRSP closing price during the repurchase month and for the one month
window surrounding the repurchase. However, for longer windows, a different picture emerges.
Firms that are in the lowest quartiles of insider net buying (which are those that have high insider
selling) have a positive mean and median relative repurchase price over the three- and six-month
windows surrounding the repurchase month. That is, when insiders tend to be selling and the
firm is repurchasing, the firm repurchases at a relatively high price. This contrasts with our
earlier findings of apparent market timing of repurchases by managers, and shows that not all
managers time the market. These results suggest that firms repurchasing stock during periods
4
Quartile 1 has net insider buying of -0.007 (thus more selling than buying) and Quartile 4 has net insider buying of
0.001.
13
when insiders are net sellers do so at significantly higher values than average, or they appear to
mis-time the market. In contrast, firms with substantial insider buying repurchase at significantly
lower mean and median relative prices for all three windows: ±1, ±3 and ±6 months.
In Table 7, we examine the effects of net insider buying on the relative repurchase price
in a multivariate setting. The coefficient on net insider buying is significantly negative,
confirming our univariate results that firms repurchase at significantly lower relative prices when
insiders are also net buyers. This result is consistent with the findings of Bonaimé and Ryngaert
(2011), which finds that firms repurchasing with concurrent net insider buying have higher longrun returns. 5 However, whereas Bonaimé and Ryngaert examine long-run returns following the
quarter of a repurchase, we focus on the actual price paid in the repurchase.
Table 7 shows that, after controlling for net insider buying, we continue to find that
infrequent repurchasers obtain a lower repurchase price over each time window we examine.
Taken together, these results provide evidence that repurchasing firms obtain lower relative
repurchase prices when insiders are net purchasers of stock and when the firm repurchases less
often. These results provide evidence that some firms time the market using open market
repurchases and offer insights into which firms time the market.
4.2. Announcement returns
Our results thus far demonstrate that firms which repurchase infrequently time their
repurchases to obtain a lower repurchase price, coinciding with more insider buying. In this
5
Several papers examine the correlation between insider trades and firms repurchase as well as how the
announcement and long run returns vary based on insider trading behavior [Lee, Mikkelson, and Partch (1992),
Chan, Ikenberry and Lee (2003), Louis, Sun, and White (2010), Babenko, Tserlukevich, and Vedrashko (2011), and
Bonaimé and Ryngaert (2009)]. These papers provide mixed evidence of the related timing of insider buying and
firm repurchases as well as the impact of long run returns. However, consistent insider buying being an indication
of market timing, Bonaimé and Ryngaert (2011) find higher long run returns after repurchasing by firms with
concurrent net insider buying.
14
section, we examine returns surrounding announcements of repurchase programs to investigate
whether investors anticipate firms’ timing through repurchases. Thus, for the 1,243 firms that
repurchase stock over our 2004-2006 sample period, we search SDC for repurchase
announcements back to January 1, 2000. We then match repurchases to the most recent
announcement. Since repurchase programs are often approved for up to four years, we search for
repurchase program announcements up to 4.5 years prior to repurchase. Using this procedure, we
are able to find and match announcement dates for 716 firms where the announcement date is
within 4.5 years of the actual repurchase. These announcements occur on average (at the median)
18 months (one year) prior to the repurchase.
We summarize the announcement returns in Panel A of Table 8. The average three-day
cumulative announcement return is 1.2%, which is consistent with prior evidence, given the
majority of the announcement are open market stock repurchases [Vermaelen (1984), Comment
and Jarrell (1991), Ikenberry et al. (1995), and Grullon and Michaely (2002)]. To examine the
variation in announcement CARs, we categorize firms into quartiles based upon their
announcement returns. We find substantial variation in CARs, with the lowest quartile having an
average three-day abnormal returns of –4.9% (median –3.4%), and highest quartile having an
average abnormal returns of 8.0% (median 6.2%). Thus, we may expect that, if announcement
returns measure undervaluation and if this undervaluation is not fully corrected by the
announcement, the announcement return will be correlated with the relative repurchase price.
We next investigate the relation between the announcement CAR, which signals potential
undervaluation, and our relative repurchase price measure, which captures the manager’s ability
to actually capture any remaining undervaluation with subsequent repurchases. Panel B of Table
8 presents mean and median relative repurchase prices for firms divided by quartiles based on
the announcement return, using various CRSP comparison windows.
15
If investors anticipate firms’ timing through repurchases, we would expect firms that
repurchase to signal undervaluation would have a positive and higher CAR at the repurchase
announcement. However, if the announcement corrects for mispricing, we would not expect any
variation in the relative repurchase price across the CAR quartiles. Alternatively, if firms remain
substantially undervalued after the announcement and the degree of post-announcement
mispricing is correlated with the degree of pre-announcement mispricing (as assumed in the
long-run performance literature), then we would expect that firms with the lowest announcement
returns will be those that also repurchase at the lowest relative price. Thus, the correlation
between the CAR and the relative repurchase price may be positive or negative. Assuming that
firms with high CARs are more undervalued and remain more undervalued, then we would
expect a positive correlation. But, if a lower CAR results from less reaction for a given level of
misevaluation (perhaps a more serve under reaction), then we may expect a negative correlation.
For shorter windows surrounding the repurchase, we find no significant differences in the
mean relative repurchase price between high and low CAR quartiles. However, we find
significant differences in mean and median relative repurchase price for high and low CAR
quartiles for the six month window surrounding actual repurchases and a significant difference in
medians for the repurchase month. The relative repurchase price is 0.51% lower over a sixmonth window for firms with the lowest CARs, indicating that these firms, with a less positive or
negative reaction at the announcement, are able to repurchase at a lower price. However, once
we control for other firm characteristics in a multivariate setting, the differences disappear. That
is, in untabulated tests, we include the repurchase announcement CAR in a multivariate regression similar to that shown in Table 5, we find no evidence that announcement returns are
significantly related to the relative repurchase price. Taken together, the results suggest that, at
16
the time of the repurchase program announcement, investors do not anticipate any future ability
of management to time the market through repurchases.
4.3. Information asymmetry
In the prior section, we demonstrate that investors do not anticipate managers’ ability to
time the market through repurchases. To further examine how the motives to repurchase impact
the price paid in a repurchase and to better understand the information managers use in timing
stock repurchases, we next investigate the influence of information asymmetry. If managers have
superior information and use this to time the market and get a lower relative repurchase price,
then we may expect the effects to be stronger when the firm are opaque, and thus more difficult
to value.
We use two measures from IBES to capture information asymmetry: the number of
analysts following the stock and the dispersion of the EPS forecast divided by the absolute value
of the mean forecast in the most recent period reported prior to the repurchase month. Brennan,
Jegadeesh and Swaminathan (1993) find that stocks that are followed by many analysts react
faster to common information than stocks followed by a few analysts. Krishnaswami and
Subramaniam (1999) argue that disagreement among analysts is an indication of the lack of
information about the firm. Thus, we expect information asymmetry to be decreasing in the
number of analysts following the stock and increasing in the dispersion of analysts’ forecasts.
We examine the relation between information asymmetry and the relative repurchase
price in Table 9. Similar to Table 7, we regress the relative repurchase price on repurchase
frequency, insider buying, firm characteristics. and year and firm fixed effects, but here, in Table
9, we include the two measures of information asymmetry. As in Tables 5 and 7, the dependent
17
variable is the relative repurchase price measured over ±1, ±3 and ±6 months of the repurchase,
respectively.
Although we find no relation between the relative repurchase price and the number of
analysts following a firm, we find a significant negative relation between EPS forecast dispersion
and the relative repurchase price for all comparison windows. This evidence provides support for
the contention that opaque, harder-to-value firms are better able to time the market. Notably,
after including the information asymmetry variables, we continue to find that infrequent
repurchasers and repurchases that coincide with insider buying receive a significantly lower
relative repurchase price. The evidence thus far indicates that, on average, managers are able to
time the market by repurchasing stock and that the degree of potential mispricing captured by the
firm varies based on the frequency of the repurchase, insider buying, and information
asymmetry.
5. Forward-looking relative repurchase price
Thus far, we have used comparison periods that span before and after the repurchase to
determine the relative price. The rationale for this balanced measure is that firms are looking at
windows for when to repurchase and, if they are timing the market, firms choose low prices
within that window. However, much of the long-run performance literature examines the prices
after the announcement. Thus, providing a similar measure using comparison windows after the
actual repurchase may add additional insight, as we would expect managers’ insight to be
forward-looking if they can time the market. Further, it is difficult to interpret the results from
the multivariate regressions that use windows before and after the repurchase, as the dependent
variable includes prices from before the repurchase and firm characteristics are from the fiscal
year end prior to the repurchase, which may encompass the evaluation window.
18
We, therefore, next examine a forward-looking relative repurchase price. Specifically, we
recalculate equation (1), replacing the comparison price (CP) with the average of CRSP closing
prices measured the month of and t months after the repurchase, were “t” is one, three, or six
months after the repurchase month. In other words, we exclude the pre-repurchase month(s)
portion of the comparison period. We then repeat all analysis presented in this paper. For brevity,
we do not present the univariate statistics. However, the average relative repurchase price
variables using these forward-looking alternative comparison periods are negative and follow a
similar pattern within subcategories based on frequency of repurchase.
In Table 10, we present results similar to those presented in Table 9 using the three
forward-looking windows. In general, the results are similar to those using windows surrounding
the repurchase: smaller firms, firms with lower M/B ratios, firms whose insiders are net
purchasers of stock, and firms which repurchase infrequently tend to repurchase at a lower price,
although the coefficients for infrequent repurchasers are significant for the one- and three-month
windows and those for net insider buying are significant at the three- and six-month windows.
The results for the information asymmetry proxies suggest that firms with more
information asymmetry are better able to forecast when prices are undervalued. While EPS
forecast dispersion is no longer significant for the forward-looking windows, the # analysts
variable is significantly positive, suggesting that firms with lower analyst following (more
information asymmetry) tend to repurchase at lower prices. Further, the evidence on size is
consistent with this interpretation, if we assume smaller firms are harder to value.
Regardless of whether we use measurement windows surrounding the repurchase month
or windows that follow the repurchase month, we generally find that firms which repurchase
infrequently and those in which insiders are net buyers are able to time the market, that is,
repurchase at a relatively low price.
19
6. Controlling for market risk factors
We provide evidence that firms which repurchase infrequently and those for whom
managers trade on their own account repurchase at relatively low prices. We find that these firms
repurchase both at historically low prices and that firms seem to be able to repurchase ahead of a
price increase. However, our analysis thus far has not controlled for market risk. In this section
we examine post-repurchase returns utilizing Fama French regressions, controlling for the
market, small minus big, and high minus low book to market factors. We implement these
regressions using the month of the repurchase plus three and six months following the
repurchase. For the month of the repurchase, we estimate the return by comparing the repurchase
price to the month-end closing price. All other monthly returns are calculated using monthly
returns.
If managers have inside information and use this information to time the market, we
predict a positive and significant alpha. We estimate these regressions on the full sample as well
as on portfolios based on infrequent versus frequent repurchasers and for firms with low versus
high insider net purchasing, as we have found evidence of timing among firms which repurchase
infrequently and those in which insiders purchase on their own account.
As shown in Panel A of Table 11, for the whole sample, we find a positive intercept
(alpha) for the short-run returns, of three months and six months. This evidence confirms that
managers are able to time the market over these horizons. Next, in Panel B, we compare the
alphas of subgroups by repurchase frequency and by the amount of net insider purchases, based
on the evidence presented about which firms are able to time the market.
To examine the market-adjusted returns by repurchase frequency, we form a portfolio of
infrequent repurchasers (1-4 times/year) and a portfolio for frequent repurchasers
≥9( times a
year). We find that both portfolios exhibit significantly positive alphas at the three month
20
horizon and, consistent with our prior evidence, firms which repurchase infrequently
significantly outperform frequent repurchasers. Similarly, we form a portfolio of repurchasers
with low insider net buys and another portfolio of repurchasers with high insider net buys. We
find a significantly positive alpha for firms with high insider net buys for the three-month
horizon, but the alpha for portfolio with low insider net buys is not significant and is not
significantly different from the alpha for the portfolio with high insider net buys at the threemonth horizon. Panel C of Table 11 presents the results over the six-month horizon. We find a
significantly positive alpha for infrequent repurchasers, but no significant alphas for any of the
other portfolios.
Overall, the evidence demonstrates that firms that are able to time the market with
repurchases are those which repurchase infrequently and those in which insiders are net
purchasers on their own account. These results suggest that some managers are able to time the
market with repurchases.
7. Conclusion
By utilizing a new dataset of monthly prices and shares repurchased for a complete
sample of firms that repurchased stock between 2004 and 2006 in the U.S., this paper examines
the ability of firms to time the market using repurchases. By utilizing the actual price paid in the
repurchase and comparing this repurchase price to average market prices available over several
windows, we show that many firms are able to time the market. We further show that this ability
varies with the frequency of the repurchase, the correlation with insider trades, and several firm
characteristics. We further provide evidence that firms with greater information asymmetry have
greater ability to time the market. We confirm our findings using Fama and French regressions
and provide evidence that managers are able to time the market in the short-term.
21
This paper contributes to a vast literature on stock repurchases and firms’ ability to time
the market when they repurchase stock. Our paper is the first to utilize the actual average
monthly price paid for a full sample of all U.S. repurchasing firms. In doing so, this paper goes
beyond documenting potential timing but is able to explore the cross-sectional variation in
timing in order to give show not only into if managers can time the market but to provide insight
into what they know.
22
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24
Appendix I: Variable definitions
Variable
Definition
Infrequent repurchaser
Indicator equal to 1 if the firm repurchases four or fewer months a year.
Frequent repurchaser
Indicator equal to 1 if the firm repurchases nine or more months a year.
# analysts
Natural log of the number of analysts following the stock from IBES prior to the
repurchasing month.
EPS forecast dispersion
Standard deviation of EPS forecasts divided by the average forecast using the forecast
closest but prior to the repurchase month.
Complex firm dummy
Dummy variable equal to one if above-median factor score, developed in Coles et al
(2008) based on the number of segments in which the firm operates, the log of sales,
and the leverage ratio.
Total assets
Given in millions
Market-to-book
Market-to-book ratio, measured as market value of equity plus the long term debt and
the current portion of long term debt divided by total assets.
Return on assets
Measured as income before extraordinary items for the four quarters prior to the
repurchase divided by total assets.
Leverage
Long-term debt and the current portion of long term debt divided by total assets.
Cash-to-assets
Measured as cash and equivalents divided by total assets.
Dividend payout
Measured as cash dividends divided by total assets.
Repurch size/MV
Average price paid for the shares repurchased times the number of shares repurchased
(as given the 10-K) divided by the market value of equity from the previous quarter
(from Compustat).
Annual repurch/MV
Sum annually of the monthly amounts spent on repurchases divided by the prior
period's market value of equity.
The next three variables are quartile variables, where firms are sorted based upon the variable of interest and put into
quartiles with the lower firms being in quartile 1:
(1) Net insider buying
Net buys by insiders minus sells in the month of the repurchase, divided by the shares
outstanding in the quarter prior to the repurchase.
(2) Net insider buying relative to
average closing price
Average price paid by insiders in the month of the repurchase, divided by the average of
closing prices on CRSP during the same month, minus one.
(3) Announcement return
Three-day abnormal return at the announcement of the stock repurchase.
25
Table 1: Summary statistics for firms conducting repurchases, summarized by firm-year
The sample consists of 1,243 unique firms conducting 15,866 monthly repurchases from 2004-2006 (there are 4,248
monthly repurchases in 2004; 5,596 monthly repurchases in 2005; and 6,022 monthly repurchases in 2006). Firms are
categorized based upon the frequency of repurchases in each calendar year. Infrequent repurchasers are firms that
repurchase 1-4 times in a given year, moderate repurchasers are firms that repurchase 5-8 times in a given year, and
frequent repurchasers are firms that repurchase at least nine times in a given year.
Year
Aggregate
repurchases ($B)
Repurchasing frequency (as % repurchasers)
# firms
repurchasing
Infrequent
Moderate
Frequent
2004
$ 165
847
50.9%
30.8%
18.3%
2005
$ 304
1,018
46.8%
30.8%
22.4%
2006
$ 379
1,175
49.9%
31.0%
19.1%
3,040
49.1%
30.9%
20.0%
10.8%
23.6%
65.6%
Repurchasing firm-years
% of aggregate $ value of repurchases
26
Table 2: Summary statistics by repurchase frequency
The sample consists of 1,243 unique firms conducting 15,866 monthly repurchases from 2004-2006. This table provides
means (medians) for repurchasing firm characteristics using data from Compustat, based upon repurchase frequency.
Infrequent repurchasers are firms that repurchase 1-4 times during the year, moderate repurchasers are firms that
repurchase 5-8 times a year, and frequent repurchasers are firms that repurchase at least nine times per year. See the
appendix for variable definitions. All variables except repurchase price and shares repurchased are measured the quarter
prior to the repurchase. Each variable (except RepurchSize/MV) is summarized at the firm-year observations.
RepurchSize/MV is summarized at the firm-month observation (since this is the frequency that repurchase data are
available). ***,**,* indicate significant differences between the groups “Infrequent” and “Frequent” repurchasers at the
1%, 5% and 10% levels, respectively, using t-tests for means and the Wilcoxon non-parametric test for medians.
Firm characteristic
Full sample
Infrequent
Moderate
Frequent
Difference:
Frequent –
Infrequent
Total assets (millions)
$5,836
($ 938)
$2,885
($ 622)
$4,069
($1,014)
$15,701
($ 2,991)
$12,816***
($ 2,369***)
Market-to-book
1.964
(1.583)
1.872
(1.505)
2.013
(1.605)
2.114
(1.822)
0.242***
(0.317***)
ROA
1.91%
(1.85%)
1.52%
(1.66%)
2.11%
(1.88%)
2.54%
(2.25%)
1.02%***
(0.59%***)
Leverage
16.18%
(13.45%)
15.86%
(11.39%)
15.63%
(12.37%)
17.79%
(17.09%)
1.93%**
(5.70%***)
Cash/Assets
18.89%
(11.54%)
20.55%
(13.14%)
18.79%
(11.69%)
15.00%
(9.68%)
−5.55%***
(−3.46%***)
Dividend payout
1.29%
(0.0%)
1.07%
(0.00%)
1.33%
(0.00%)
1.75%
(0.94%)
0.68%***
(0.94%***)
Repurch size/MV
0.76%
(0.33%)
1.37%
(0.40%)
0.71%
(0.36%)
0.48%
(0.29%)
−0.89%***
(−0.10%***)
Annual repurch/MV
4.23%
(2.26%)
3.68%
(1.08%)
4.51%
(3.36%)
5.14%
(4.21%)
1.46%
(3.13%***)
892
583
Repurchase frequency
Observations
2,889
1,414
27
Table 3: Mean (median) relative repurchase price by year
The sample consists of 1,243 unique firms conducting 15,866 monthly repurchases from 2004-2006. In this table, we
measure the percentage difference between the average (median) repurchase price paid by a firm during the repurchase
month (as reported in the 10-K) and the average closing stock prices (as reported on CRSP) during the repurchase month,
as well as for other windows surrounding the repurchase month (±1 month, ±3 months, and ±6 months). This percentage
is termed the “relative repurchase price” and is measured as:
Relative repurchase price = (Average repurchase price paid)/(Average closing price from CRSP) – 1
***, **, * denote that the average (median) relative price is significantly different from zero at the 1%, 5%, and 10%
levels using t-test for means and Wilcoxon nonparametric test for medians.
Number of months before/after repurchase:
Repurchase
month
1 month
3 months
6 months
2004
−0.87%***
(−0.38%***)
−1.27%***
(−0.86%***)
−1.86%***
(−1.36%***)
−2.31%***
(−1.78%***)
2005
−0.54%***
(−0.21%***)
−0.93%***
(−0.55%***)
−1.63%***
(−1.22%***)
−2.13%***
(−1.76%***)
2006
−0.66%***
(−0.31%***)
−0.91%***
(−0.70%***)
−1.31%***
(−1.08%***)
−1.88%***
(−1.88%***)
Full sample
−0.67%***
(−0.29%***)
−1.01%***
(−0.69%***)
−1.57%***
(−1.20%***)
−2.01%***
(−1.80%***)
Year
28
Table 4: Mean (median) relative repurchase price by repurchase frequency
The sample consists of 1,243 unique firms conducting 15,866 monthly repurchases from 2004-2006. This table provides
means and medians, by repurchasing frequency, of the relative repurchase price. The “relative repurchase price” is
measured as the percentage difference between the average repurchase price paid during a repurchase month (as reported
in the 10-K) and the average closing stock prices, as reported on CRSP during the repurchase month, as well as for other
windows surrounding the repurchase month (±1 month, ±3 months, and ±6 months):
Relative repurchase price = (Average repurchase price paid)/(Average closing price from CRSP) – 1
Means and medians are reported by repurchasing frequency. ***, **, * denote that the average (median) relative price is
significantly different from zero at the 1%, 5%, and 10% levels using a t-test for means and Wilcoxon test for medians.
“P-Value For Difference Between Frequent – Infrequent Repurchasers” measures the significance of the difference in
relative repurchase price for monthly repurchasers minus that for infrequent repurchasers, those repurchasing fewer than
five times a year.
Repurchase
frequency
Repurchase
month
Number of months before/after repurchase:
1 month
3 months
6 months
Infrequent repurchasers:
Once per year
−1.62%***
(−1.03%***)
−2.85%***
(−2.61%***)
−4.17%***
(−3.56%***)
−5.03%***
(−4.81%***)
2−4 times a year
−1.17%***
(−0.64%***)
−1.99%***
(−1.68%***)
−3.04%***
(−3.04%***)
−4.40%***
(−4.40%***)
−0.71%***
(−0.42%***)
−1.02%***
(−0.86%***)
−1.50%***
(−1.38%***)
−2.02%***
(−2.06%***)
9−11 times a year
−0.44%***
(−0.21%***)
−0.54%***
(−0.34%***)
−0.76%***
(−0.59%***)
−0.98%***
(−0.91%***)
Monthly
−0.15%***
(−0.05%***)
−0.17%***
(−0.12%***)
Moderate repurchasers:
5−8 times a year
Frequent repurchasers:
Difference between frequent–infrequent repurchasers:
Means
0.88%***
1.67%***
Medians
(0.56%***)
(1.49%***)
29
−0.12%
(0.01%)
3.03%***
(3.12%***)
−0.05%
(−0.11%)
4.15%***
(3.79%***)
Table 5: Regressions of relative repurchase price
The sample consists of 1,243 unique firms conducting 15,866 monthly repurchases from 2004-2006. This table reports
regressions of the relative repurchase price on firm and repurchasing characteristics. The “relative repurchase price” is
measured as the percentage difference between the average repurchase price paid by the firm during a repurchase month
(as reported in the 10-K) and the average closing stock prices as reported on CRSP, during various windows surrounding
the repurchase month (±1 month, ±3 months, and ±6 months), where:
Relative repurchase price = (Average repurchase price paid)/(Average closing price from CRSP) – 1
Each variable is summarized at the firm-year. See Appendix I for variable definitions. All regressions include year and
firm fixed effects and cluster standard errors at the firm level. P-values are in parentheses and *, **, and *** indicate
significance at the 5%, 1%, and 0.1% level, respectively.
Infrequent repurchaser
Number of months before/after repurchase:
1 month
3 months
6 months
-0.006***
-0.011***
-0.011***
(0.000)
(0.000)
(0.004)
Frequent repurchaser
0.001
(0.352)
0.001
(0.512)
0.000
(0.919)
Ln(total assets)
-0.001
(0.911)
0.014**
(0.029)
0.057***
(0.000)
Market-to-book
-0.005***
(0.000)
0.005***
(0.005)
0.033***
(0.000)
Return on assets
-0.009
(0.613)
-0.027
(0.360)
-0.075*
(0.098)
Leverage
-0.002
(0.857)
-0.006
(0.731)
-0.020
(0.510)
Cash-to-assets
-0.001
(0.891)
0.013
(0.300)
0.059***
(0.004)
Intercept
0.002
(0.949)
-0.132***
(0.006)
-0.507***
(0.000)
Adjusted R2
Observations
0.171
14,565
0.175
14,565
0.209
14,565
30
Table 6: Mean (median) relative repurchase price by level of insider trading
This table reports means and median relative repurchase prices for 7,129 repurchases by firms during months in which
insiders also trade on their own account, for the 2004-2006 time period. The “relative repurchase price” is measured as the
percentage difference between the average repurchase price paid by the firm during a repurchase month (as reported in the
10-K) and the average closing stock prices as reported on CRSP, during various windows surrounding the repurchase
month (±1 month, ±3 months, and ±6 months), where:
Relative repurchase price = (Average repurchase price paid)/(Average closing price from CRSP) – 1
Firms are broken into quartiles, based upon the amount of relative insider buying (net insider buys minus net insider sells).
***, **, * denote that the average (median) relative price is significantly different from 0% at the 1%, 5%, and 10% levels
(using a t-test for means and Wilcoxon test for medians).
Repurchase
month
Number of months before/after repurchase:
1 month
3 months
6 months
Quartile 1 (less insider buying)
−0.81%***
(−0.41%***)
−0.44%***
(−0.16%***)
0.09%
(0.42%***)
Quartile 2
−0.42%***
(−0.42%***)
−0.65%***
(−0.29%***)
−0.51%***
(−0.26%***)
−0.41%**
(−0.36%*)
Quartile 3
−0.58%***
(−0.28%***)
−0.62%***
(−0.45%***)
−0.66%***
(−0.41%***)
−0.78%***
(−0.74%***)
Quartile 4 (more insider buying)
−0.82%***
(−0.34%***)
−1.53%***
(−1.11%***)
−2.55%***
(−2.04%***)
−3.39%***
(−2.83%***)
−0.01%
(0.07%)
−1.08%***
(−0.95%***)
−2.64%***
(−2.46%***)
−4.10%***
(−3.53%***)
Insider trading
shares
Difference between Q4–Q1:
Means
Medians
31
0.70%***
(0.70%***)
Table 7: Relative price regressions, including insider trading
The sample consists of 1,243 unique firms conducting 15,866 monthly repurchases from 2004-2006. This table repeats the
analysis of Table 5, but includes measures of information asymmetry. The “relative repurchase price” is measured as the
percentage difference between the average repurchase price paid by the firm during a repurchase month (as reported in the
10-K) and the average closing stock prices as reported on CRSP, during various windows surrounding the repurchase
month (±1 month, ±3 months, and ±6 months), where:
Relative repurchase price = (Average repurchase price paid)/(Average closing price from CRSP) – 1
Each variable is summarized at the firm-year. All firm characteristic variables included in Table 5 are included here but
not presented. See Appendix 1 for variable definitions. All regressions include year and firm fixed effects and cluster
standard errors at the firm level. ***, **, and * denote significance at the 1%, 5%, and 10% , respectively.
1 month
3 months
6 months
Infrequent repurchaser
-0.008***
(0.001)
-0.012***
(0.002)
-0.014**
(0.020)
Frequent repurchaser
0.001
(0.735)
-0.000
(0.896)
-0.002
(0.668)
Net insider buying
-0.005***
(0.000)
-0.012***
(0.000)
-0.018***
(0.000)
Ln(total assets)
0.004
(0.530)
0.020**
(0.022)
0.063***
(0.000)
Market-to-book
-0.006***
(0.000)
0.063
(0.264)
0.017
(0.307)
0.007
(0.551)
0.002
(0.332)
0.054
(0.524)
0.016
(0.511)
0.016
(0.360)
0.027***
(0.000)
-0.067
(0.570)
0.009
(0.817)
0.056*
(0.060)
Intercept
-0.015
(0.738)
-0.141**
(0.038)
-0.502***
(0.000)
Adjusted R2
Observations
0.245
7,005
0.234
7,005
0.251
7,005
Return on assets
Leverage
Cash-to-assets
32
Table 8: Repurchase announcement CARs
This table examines the 716 firms (of our full sample of 1,243 firms) that report repurchase program announcements over
the 2004-2006 period. Panel A presents the mean and median 3-day CARs for these 716 repurchase program
announcements, broken into quintiles based upon the size of the announcement return, where Quartile 1 includes
repurchases with the lowest CARs and Quartile 4 represents repurchases with the highest CARs.
Panel B presents the mean and median relative price paid, by CAR level quartiles, for the 9,766 repurchases following the
716 repurchase program announcements. The “relative repurchase price” is measured as the percentage difference between
the average repurchase price paid during a repurchase month (as reported in the 10-K) and the average closing stock
prices, as reported by CRSP during the repurchase month, as well as during various windows surrounding the repurchase
month (±1 month, ±3 months, and ±6 months), where:
Relative repurchase price = (Average repurchase price paid)/(Average closing price from CRSP) – 1
***, **, * denote that the average (median) relative price is significantly different from 0% at the 1%, 5%, and 10% levels
(using a t-test for means and Wilcoxon test for medians).
Panel A: Mean and median 3-day CARs by abnormal return quartile
CAR Quartile
Full sample
By CAR quartile:
Quartile 1 (lowest CARs)
Quartile 2
Mean
Median
# of Announcements
1.2%
0.8%
711
–4.9%***
–0.2%***
–3.4%***
–0.2%***
178
178
Quartile 3
2.0%***
2.0%***
192
Quartile 4 (highest CARs)
8.0%***
6.2%***
163
12.9%***
9.6%***
Difference between Q4–Q1
Panel B: Mean (median) relative repurchase price by CAR quartile
CAR quartile
Number of months before/after repurchase:
Repurchase
month
1 month
3 months
6 months
Quartile 1 (lowest CARs)
−0.77%***
(−0.45%***)
−1.23%***
(−0.99%***)
−2.01%***
(−1.64%***)
−2.86%***
(−2.42%***)
Quartile 2
−0.45%***
(−0.22%***)
−0.70%***
(−0.49%***)
−1.09%***
(−0.70%***)
−1.38%***
(−1.14%***)
Quartile 3
−0.67%***
(−0.27%***)
−0.87%***
(−0.58%***)
−1.30%***
(−1.08%***)
−1.78%***
(−1.62%***)
Quartile 4 (highest CARs)
−0.78%***
(−0.24%***)
−1.22%***
(−0.79%***)
−1.86%***
(−1.51%***)
−2.35%***
(−2.35%***)
P-value for difference of Q4 – Q1:
Means
0.01%
Medians
(0.21%**)
0.01%
(0.20%)
1
0.15%
(0.13%)
0.51%**
(0.07%*)
Table 9: Regressions of relative repurchase price, including measures of information asymmetry
The sample consists of 1,243 unique firms conducting 15,866 monthly repurchases from 2004-2006. This table reports
regressions of the relative repurchase price on firm and repurchasing characteristics. The “relative repurchase price” is
measured as the percentage difference between the average repurchase price paid by the firm during a repurchase month
(as reported in the 10-K) and the average closing stock prices as reported on CRSP, during various windows surrounding
the repurchase month (±1 month, ±3 months, and ±6 months), where:
Relative repurchase price = (Average repurchase price paid)/(Average closing price from CRSP) – 1
Each variable is summarized at the firm-year. See Appendix 1 for variable definitions. All regressions include year and
firm fixed effects and cluster standard errors at the firm level. P-values are in parentheses and *, **, and *** indicate
significance at the 5%, 1%, and 0.1% level, respectively
Number of months before/after repurchase
1 month
3 months
6 months
Infrequent repurchaser
-0.008***
(0.002)
-0.012***
(0.004)
-0.012**
(0.043)
Frequent repurchaser
0.000
(0.980)
-0.001
(0.700)
-0.003
(0.569)
Net insider buying
-0.006***
(0.000)
-0.013***
(0.000)
-0.018***
(0.000)
# analysts
-0.001
(0.681)
0.005
(0.247)
0.009
(0.178)
EPS forecast dispersion
-0.002**
(0.029)
-0.003**
(0.016)
-0.005***
(0.000)
Ln(total assets)
0.001
(0.807)
0.020**
(0.029)
0.062***
(0.000)
Market-to-book
-0.007***
(0.000)
0.001
(0.565)
0.027***
(0.000)
Return on assets
0.109
(0.118)
0.129
(0.186)
-0.017
(0.906)
Leverage
0.022
(0.163)
0.019
(0.434)
0.000
(0.990)
Cash-to-assets
0.006
(0.624)
0.018
(0.301)
0.065**
(0.043)
Intercept
0.007
(0.878)
-0.153**
(0.038)
-0.533***
(0.000)
Adjusted R2
Observations
0.226
6,356
0.220
6,356
2
0.246
6,356
Table 10: Regressions of forward-looking relative repurchase price measure
The sample consists of 1,243 unique firms conducting 15,866 monthly repurchases from 2004-2006. This table reports
regressions of the relative repurchase price on firm and repurchasing characteristics, repeating the analysis in Table 7 with
a forward-looking relative repurchase price measure. The “relative repurchase price” is measured as the percentage
difference between the average repurchase price paid by the firm during a repurchase month (as reported in the 10-K) and
the average closing stock prices as reported on CRSP, during various windows following the repurchase month (+1 month,
+3 months, and +6 months), where:
Relative repurchase price = (Average repurchase price paid)/(Average closing price from CRSP) – 1
Each variable is summarized at the firm-year. See Appendix for variable descriptions. All regressions include year and
firm fixed effects and cluster standard errors at the firm level. P-values are in parentheses and *, **, and *** indicate
significance at the 5%, 1%, and 0.1% level, respectively
Number of months after repurchase:
1 month
3 months
6 months
Infrequent repurchaser
-0.005**
(0.049)
-0.009*
(0.068)
-0.011
(0.135)
Frequent repurchaser
-0.000
(0.978)
-0.001
(0.769)
-0.004
(0.553)
Net insider buying
-0.001
(0.287)
-0.004***
(0.001)
-0.008***
(0.000)
# analysts
0.003
(0.297)
0.012**
(0.041)
0.022**
(0.016)
EPS forecast dispersion
-0.001
(0.180)
-0.003
(0.485)
-0.006
(0.391)
Ln(total assets)
0.030***
(0.000)
0.093***
(0.000)
0.161***
(0.000)
Market-to-book
0.007***
(0.001)
0.029***
(0.000)
0.052***
(0.000)
Return on assets
0.102
(0.165)
0.205
(0.170)
0.269
(0.147)
Leverage
0.011
(0.566)
-0.012
(0.753)
-0.047
(0.426)
Cash-to-assets
0.004
(0.776)
0.036
(0.155)
0.096**
(0.018)
Intercept
-0.270***
(0.000)
-0.825***
(0.000)
-1.431***
(0.000)
Adjusted R2
Observations
0.164
6,356
0.227
6,356
3
0.320
6,356
Table 11: Fama French Regressions
This table presents the results from calendar-time portfolio regressions, where the dependent variables are monthly
portfolio returns in excess of the Treasury bill rate. The dependent variable is regressed on three Fama and French (1993)
factors: excess return on the market (RMRF), the return difference between a portfolio of small and big stocks, and the
return difference between a portfolio of high and low book-to-market stocks.
Panel A presents the results for the full sample, for various windows. Monthly portfolios include returns of all firms that
repurchased stock during prior three and six months, respectively. Panels B and C present monthly portfolios of the returns
of all firms that repurchased stock in the prior three and six months, respectively, for subsamples of firms. The subsamples
include firms broken into quartiles based upon firm repurchasing frequency and the amount of net insider purchases.
Significance of coefficients is indicated with *, **, and *** for 10%, 5%, and 1% respectively.
Panel A: Fama-French regressions for the full sample
Intercept
RMRF
Monthly returns for firms that have repurchased within:
Past three months
0.005***
0.850***
Past six months
0.003**
0.920***
SMB
0.458***
0.443***
HML
Adj R2
-0.230***
-0.122*
0.95
0.96
Panel B: Fama-French regressions for subsamples: repurchased within past three months
Intercept
Terciles by firm repurchasing frequency:
T1 (Infrequent: 1-4 times/year)
0.012***
T3 (Frequent: ≥9 times/year)
0.003**
T3-T1 (Frequent−Infrequent)
-0.008***
RMRF
SMB
HML
Adj R2
0.952***
0.834***
-0.117
0.653***
0.279***
-0.374**
-0.365***
-0.242***
0.123
0.91
0.92
0.42
Quartiles by amount of net insider purchases:
Q1 (Low insider net buys)
0.004
Q4 (High insider net buys)
0.006***
Q4-Q1 (High−Low)
0.002
0.855***
0.791***
-0.065
0.669***
0.405***
-0.264*
0.013
-0.185**
-0.198
0.86
0.93
0.22
Panel C: Fama-French Regressions for subsamples: repurchased within past six months
Intercept
RMRF
SMB
HML
Adj R2
Terciles by firm repurchasing frequency:
T1 (Infrequent: 1-4 times/year)
0.006***
T3 (Frequent: ≥9 times/year)
0.002
T3-T1 (Frequent−Infrequent)
-0.003
1.020***
0.890***
-0.130
0.700***
0.275***
-0.424***
-0.022
-0.195**
0.174
0.95
0.93
0.46
Quartiles by amount of net insider purchases:
Q1 (Low insider net buys)
0.001
Q4 (High insider net buys)
0.002
Q4-Q1 (High−Low)
0.001
0.941***
0.927***
-0.014
0.611***
0.301***
-0.310***
0.044
-0.119
-0.163
0.89
0.95
0.24
4