Post-announcement effects on earnings from share repurchases: An empirical study

This study was prompted by the dramatic increase in the corporate finance activity of repurchasing shares in the open-market. The study examined certain financial characteristics of firms before and after repurchase announcements to investigate differences in those characteristics among firms that targeted a large proportion of shares to be repurchased and firms that targeted a smaller repurchase.; The study examined 132 repurchase announcements from 1998 through 2002 by Fortune 500 firms that expected to complete the repurchase with internal funds. The average repurchase target of the sample was 6.7%, consistent with the 7% average observed in a landmark study by Stephens and Weisbach (1998), who also observed that within 3 years of the announcement date over 50% of repurchases were fully completed and 74% to 82% were substantially completed. Based on this time frame, six years of financial data was obtained to examine certain financial characteristics for three years before the announcement date and three years after the announcement. The financial characteristics that were measured included three metrics for earnings and one metric for market value, with each metric measuring the percentage change in value from the prior year's value. The three earnings metrics included percentage changes to (1) cash flow per share, (2) earnings per share, and (3) dividend payout. The fourth metric compared the change in percentage return on a firm's common stock with a market index.; The findings suggested that a larger repurchase target had more of an effect on a firm's post-announcement earnings and its common stock return than a smaller repurchase target, but only in some of the tests comparing larger and smaller repurchase targets. The findings revealed a lack of consistency among all paired comparisons of larger versus smaller repurchase targets. This inconsistency, combined with the results from regression analysis suggesting limited predictability for post-announcement effects on earnings and common stock returns, led the study to recommend further investigation of share repurchases to extend the literature on share repurchases, with consideration of sample traits not investigated by this study, such as the risk profile of firms in the study, and alternative measures for earnings.