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What do market participants learn from share repurchases? Evidence from a return decomposition

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  • Jakob, Sascha
  • Valta, Philip

Abstract

This paper analyzes cash flow and cost of capital dynamics around share repurchase announcements of publicly traded US firms by decomposing stock returns into news related to cash flows and discount rates. After repurchase announcements, the cost of capital decreases significantly, while cash flows do not change. The decrease in the cost of capital is largest for firms that appear underpriced. These firms also experience the highest long-term returns after repurchase announcements. The findings suggest that market participants learn about a temporary overestimation of the cost of capital when firms announce share repurchases.

Suggested Citation

  • Jakob, Sascha & Valta, Philip, 2023. "What do market participants learn from share repurchases? Evidence from a return decomposition," Journal of Corporate Finance, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:corfin:v:82:y:2023:i:c:s0929119923001001
    DOI: 10.1016/j.jcorpfin.2023.102451
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    References listed on IDEAS

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    1. Praveen Kumar & Sorin M. Sorescu & Rodney D. Boehme & Bartley R. Danielsen, 2008. "Estimation Risk, Information, and the Conditional CAPM: Theory and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1037-1075, May.
    2. Fangjian Fu & Sheng Huang, 2016. "The Persistence of Long-Run Abnormal Returns Following Stock Repurchases and Offerings," Management Science, INFORMS, vol. 62(4), pages 964-984, April.
    3. Urs Peyer, 2009. "The Nature and Persistence of Buyback Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1693-1745, April.
    4. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    5. Jacob Oded, 2005. "Why Do Firms Announce Open-Market Repurchase Programs?," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 271-300.
    6. Alon Brav & J.B. Heaton, 2002. "Competing Theories of Financial Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 575-606, March.
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    Cited by:

    1. Naresh Gopal & Ravi S. Mateti & Duong Nguyen & Gopala Vasudevan, 2024. "Stock buybacks and growth opportunities," Review of Quantitative Finance and Accounting, Springer, vol. 63(4), pages 1413-1429, November.
    2. Salikhova, Tatiana & Ugarov, Alexander & Orlova, Svetlana, 2024. "Dividend smoothing and financial transparency," Finance Research Letters, Elsevier, vol. 62(PA).

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    More about this item

    Keywords

    Share repurchases; Return decomposition; Cost of capital; Buyback anomaly;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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