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Share Repurchases, the Clustering Problem, and the Free Cash Flow Hypothesis

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  • Chuan‐San Wang
  • Norman Strong
  • Samuel Tung
  • Steve Lin

Abstract

We examine the market reaction to announcements of actual share repurchases, events that cluster both within and across firms. Using a multivariate regression model, we find that the market reacts positively to the events, indicating that these announcements provide additional information to that contained in the initial repurchase intention announcements. Further, the market response is especially favorable for firms with overinvestment problems as measured by Tobin's q, and is not related to signaling costs as measured by the size of the repurchase. Our findings generally support the hypothesis that share repurchases reduce the agency costs of excessive free cash flow.

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  • Chuan‐San Wang & Norman Strong & Samuel Tung & Steve Lin, 2009. "Share Repurchases, the Clustering Problem, and the Free Cash Flow Hypothesis," Financial Management, Financial Management Association International, vol. 38(3), pages 487-505, September.
    • Handle: RePEc:bla:finmgt:v:38:y:2009:i:3:p:487-505
    DOI: 10.1111/j.1755-053X.2009.01045.x
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    4. Khalfan, Twahir M. & Wendt, Stefan, 2020. "The impact of ownership concentration on payout across Nordic firms," Journal of Multinational Financial Management, Elsevier, vol. 56(C).
    5. Jha, Anand & Kulchania, Manoj & Kwon, Min-Jeong, 2022. "Stock repurchasing and corporate social responsibility," Journal of Financial Stability, Elsevier, vol. 62(C).
    6. Hue Hwa Au Yong & Christine Brown & Chloe Choy Yeing Ho, 2014. "Off-Market Buybacks in Australia: Evidence of Abnormal Trading around Key Dates," International Review of Finance, International Review of Finance Ltd., vol. 14(4), pages 551-585, December.
    7. Chi-Chun Liu & Ni-Yun Chen, 2015. "Earnings Surprises in Analysts' Forecasts, Mandatory Disclosure, and Share Repurchases," Abacus, Accounting Foundation, University of Sydney, vol. 51(1), pages 63-85, March.
    8. Ni‐Yun Chen & Chi‐Chun Liu, 2021. "Share repurchases and market signaling: Evidence from earnings management," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1203-1224, December.
    9. De Cesari, Amedeo & Espenlaub, Susanne & Khurshed, Arif & Simkovic, Michael, 2012. "The effects of ownership and stock liquidity on the timing of repurchase transactions," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1023-1050.

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