The Timing of Share Repurchases

This paper examines the managerial timing ability of share repurchases using a unique data set for the U.S. for the period 2004-2010. The results document that the buyback anomaly has disappeared. There is no evidence of abnormal long-run performance of actual share repurchases, but firms buy back at below average market prices. I model and test two hypotheses to explain these findings: The market-timing hypothesis predicts that firms make use of private information and buy back before stock price increases. The contrarian-trading hypothesis predicts that firms buy back after decreases in the stock price at prices below average market prices. The empirical evidence only supports the contrarian-trading hypothesis. I conclude that neither recent repurchase announcements nor actual repurchases convey information. The difference between market prices and repurchase prices does not constitute a transfer of wealth from selling to non-selling shareholders.

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