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

Transportation Industry…Cost Structure, Stock Return
structures, other control variables shown to be important in previous studies and returns
variability measured by the firm’s beta. The variables and model are as follows.
Control Variables
Including controls allows their effects to be separately estimated from the effects of other
independent variables and reduces the likelihood that they may be surrogates for alternative
determinants of the dependent variable. The following control variables are included in this study.
lnMVEit: Fama and French (1993) showed that smaller capitalization stocks outperform large
capitalization stocks. Keim (1983) earlier showed, however, that most of the negative relationship
between market value of equity and abnormal returns occurs in January. Although the
relationship is slightly negative over the following eleven months the relationship is unstable,
with even a few months in the 1963-1979 research period displaying significant positive
relationships. We control for size by including the firm’s end of fiscal year market value of
equity. We measure this variable as number of common shares outstanding multiplied by price
per share. Since inconsistent variances violate the OLS constant variance assumption, we attempt
to mitigate this outcome by using the log of market value of equity, i.e., lnMVEit.
LEVit: As mentioned above financial leverage has been shown to be correlated with beta. We
include financial leverage and measure this variable as each firm’s end of fiscal year total longterm
debt scaled by its end of fiscal year total assets.
TURNit: Denis and Kadlec (1994) showed that beta estimates are significantly related to changes
in trading activity. Cremers and Mei (2007) assert that share turnover and systematic risk are
related. To assess the impact of share turnover on returns variance for the firms of our study,
TURNit, defined as the average daily share volume divided by the average shares outstanding, is
included in the regression.
lnSHOLDit: Using a CAPM framework, Amihud and Mendelson (1989) provide evidence that
asset returns increase with their illiquidity as measured by the bid-ask spread. O’Hara (2003)
argues that liquidity is priced by the market. Chordia, et al. (2001) showed a statistically
significantly negative relationship between stock returns and variability of liquidity. Since shares
which are thinly held may be subject to larger bid-ask price spreads and hence reduced liquidity,
we control for this potential effect by including the log of the number of total common
shareholders for each firm, at end of fiscal year t.
MBit: Fama and French (1993) showed that beta and book-to-market are positively correlated and
included this ratio in their model. We add market-to-book ratio to our model and measure this
variable as the firm’s end of fiscal year market value divided by its end of fiscal year book value.
YEAR: Campbell and Hentschel (1992) provide evidence that expected returns and stock return
volatility change over time. Year dummy variables are used to control for temporal variation of
betas across the years of this study.
Variables of Interest
BETAit: Month-end closing prices are used to measure the sensitivity of a firm’s stock price to
changes in the S&P 500 index. Using monthly returns, beta is calculated for a five year time
period. If less than five years of data is available then beta is calculated for as few as 24 months.
ASBBS E-Journal, Volume 4, No.1, 2008 124