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Australian On-Market Buy-backs: An Examination of Valuation Issues

Author

Listed:
  • Jason Mitchell

    (University of Michigan Business School, U.S.A.)

  • H. Y. Izan

    (University of Western Australia, Australia)

  • Roslinda Lim

    (Macquarie University, Australia)

Abstract

A compelling reason for engaging in on-market buy-backs is that it provides a signal about the undervaluation of the company. In this paper an alternative, accounting based, method of determining fundamental value and undervaluation is used, namely the Ohlson residual income valuation framework. It is found that prior to the announcement buy-back companies are significantly undervalued relative to comparable non-buy-back companies. This undervaluation is largely but not totally removed in the period immediately following the on-market buy-back implying on-market buy-backs are predominantly an effective signaling mechanism. Where the firm cites undervaluation as a specific motive for the buy-back then, in fact, a higher degree of undervaluation prior to the buy-back is evident. The results provide evidence that management can, and does, identify undervaluation and reduces this through the signaling mechanism of on-market buy-backs.

Suggested Citation

  • Jason Mitchell & H. Y. Izan & Roslinda Lim, 2006. "Australian On-Market Buy-backs: An Examination of Valuation Issues," Multinational Finance Journal, Multinational Finance Journal, vol. 10(1-2), pages 43-79, March-Jun.
    • Handle: RePEc:mfj:journl:v:10:y:2006:i:1-2:p:43-79
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    References listed on IDEAS

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    Cited by:

    1. Hussein Abedi Shamsabadi & Byung S. Min & Imen Tebourbi & Mohammad Nourani, 2020. "Corporate Governance in Australia: Share Repurchases under an Imputation Tax System," Capital Markets Review, Malaysian Finance Association, vol. 28(1), pages 1-23.
    2. Gould, Graeme P., 2019. "Repurchases and intended program length," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 234-247.
    3. Xiao, MingFang & Cao, June & Chiang, Yao-Min, 2022. "Kiss the baby for the nurse's sake? - Guaranteeing employees' stock purchase against loss program," International Review of Financial Analysis, Elsevier, vol. 81(C).
    4. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    5. Christine Brown & Daniel Norman, 2010. "Management choice of buyback method: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(4), pages 767-782, December.

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    More about this item

    Keywords

    buy-backs; undervaluation; fundamental value;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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