stock repurchase announcements: a test of market ... - Asbbs.org

Stock Repurchase Announcements
the announcement date, t he fir ms’ stock prices tr ended upward slightl y to day +21. This i s
consistent with the semi-strong form market efficiency h ypothesis, whic h states that the stock
price reflects all publicl y available information. Results here suggest that stock repurchas e
announcements illicit significant positive stock price reactions at the semi-strong level of market
efficiency.
CONCLUSION
This study tested the effect of stock repu rchase announcements on the stock price’ s risk
adjusted rate of return for a sample of 85 firms. These stocks were traded on the NYSE, AM EX,
or the NASDAQ. Using standard risk adjusted event study methodology with the market model,
the study analy zed 35,870 recent observations on eight y-five publicly traded fir ms and the
corresponding S&P 500 market index. Appropria te statistical tests of significance were
conducted. Results show a negativ e market re action pri or t o the firm s’ stock repur chase
announcement and a positive reaction on and after the announcement. Findings support efficient
market theory at the semi -strong form level as documented by Fama (1970). Stock repurchase
announcements illicit significant positive stock price reactions at the semi-strong level of market
efficiency.
Specifically, for this study the announcement of stock repurchase is viewed with a m ixed
signal, negative before the a nnouncement and positive afterwards. Investors appear unsure as to
management’s motivation implied by the repurchase decision. Unlike previous literature on this
issue, there is no consist ent positive signal associated with th e repurchase announcements
observed in t his stud y. E vidence here is mixed possibly d ue to sam ple selection bias or the
behavioral challenge to efficient market theory . This study suggests that the market i s not
efficient with respect to announcem ents of stock re purchases in the short te rm. Results here
question the strength of market efficiency and may offer additi onal evidence in support of the
behavioral challenge to efficient market theory.
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