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STOCK REPURCHASE ANNOUNCEMENTS: A
TEST OF MARKET EFFICIENCY
Kinsler, Nicholas A.
Longwood University
NKinsler@wellscoleman.com
Bacon, Frank W.
Longwood University
baconfw@longwood.edu
ABSTRACT
The purpose of this study was to test the semi-strong form efficient market hypothesis by
analyzing the effects of stock repurchase announcements on stock price. Specifically, is it
possible to earn an above normal return on a publicly traded stock when the firm announces a
stock repurchase? Numerous past studies suggest that with a stock repurchase announcement
goes a positive signal about the company’s future, thereby significantly increasing the firm’s
stock price. Firms repurchase undervalued stock, thus raising the stock price. According to the
semi-strong form efficient market hypothesis, it is not possible to consistently outperform the
market – adjusted appropriately for risk – by using publicly available information such as stock
repurchase announcements. This type of information should impound stock price sufficiently fast
to disallow any investor’s earning an above normal risk adjusted return. Evidence here supports
the positive signal associated with the sample stock repurchase announcements examined.
Likewise, the study results support the semi-strong form efficient market hypothesis and suggest
the possibility of trading on this information up to 30 days prior to the announcement.
Specifically, for this study the announcement of a stock repurchase is viewed with a mixed signal,
negative before the announcement and immediate positive reaction afterwards.
INTRODUCTION
A stock repu rchase oc curs when a company with excess ca sh buy s back stock for any
number of reasons. Once a corporatio n bu ys back its stock, it is ter med trea sury stock and is
ineligible to collect dividends. Some reasons corporations repurchase stock include: preventing a
hostile takeover, acquiring shares for fu ture distribution for employee options, and for converting
securities. T he main benefits fro m buy ing back stock are raisi ng the earnings per share on
remaining sh ares outstand ing and eliminating the dividend burden on the shares r epurchased.
Likewise, a stock repurchase c an be an effective tool used by companies, espe cially in tim es of
undervaluation and high taxes to attempt to raise the market price of their stock.
How fast does stock price react to corporate stock repurchase announcem ents? It follows
that the information embedded in a stock repurchase announcement could be tested to determine
how fast stock price reacts to this news and whether the reaction is weak, sem i-strong, or strong
form efficient. Previous research suggests that the market is semi-strong for m efficient with
respect to stock repurchase announcements.
ASBBS E-Journal, Volume 4, No.1, 2008 94