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Economic Sources of Gain in Stock Repurchases

Published online by Cambridge University Press:  06 April 2009

Konan Chan ,
David Ikenberry  and
Inmoo Lee
Konan Chan
Affiliation:
[email protected], Department of Finance, National Taiwan University, 50, Lane 144, Keelung Rd, Sec 4, Taipei 106, Taiwan;
David Ikenberry
Affiliation:
[email protected], Department of Finance, University of Illinois at Urbana-Champaign, 340 Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61821;
Inmoo Lee
Affiliation:
[email protected], College of Business Administration, Korea University, 1 5-ga, Anam-dong, Sungbuk-gu, Seoul 136–701, Korea.
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Abstract

Previous studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run performance. The initial reaction provides some support for the mispricing story. However, subsequent earnings-related information shocks suggest that the initial market reaction is incomplete and that long-run performance may be informative. The long-horizon return evidence is most consistent with the mispricing hypothesis and, to some degree, the free cash flow hypothesis. We find little support for the leverage hypothesis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 3 , September 2004 , pp. 461 - 479
Copyright
Copyright © School of Business Administration, University of Washington 2004

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