Market Underreaction to Open Market Share Repurchases

We examine long-run firm performance following open market share repurchase announcements which occurred during the period 1980 to 1990. We find that the average abnormal four-year buy-and-hold return measured after the initial announcement is 12.1 percent. For `value' stocks, companies more likely to be repurchasing shares because of undervaluation, the average abnormal return is 45.3 percent. For repurchases announced by `glamour' stocks where undervaluation is less likely to be an important motive, no positive drift in abnormal returns is observed. Thus, at least with respect to value stocks, the market errs in its initial response and appears to ignore much of the information conveyed through repurchase announcements.