What do we know about stock repurchases? - PowerPoint PPT Presentation

About This Presentation
Title:

What do we know about stock repurchases?

Description:

Concentrates on value stocks (high book-to-market value), four year return is 45.29 ... Black-out dates: prohibit insider trading. 9/14/09. Hu - Financing ... – PowerPoint PPT presentation

Number of Views:69
Avg rating:3.0/5.0
Slides: 15
Provided by: a014
Category:

less

Transcript and Presenter's Notes

Title: What do we know about stock repurchases?


1
Topics
  • What do we know about stock repurchases?
  • G. Grullon and D. L. Ikenberry

2
What do we know about stock repurchases?Types
  • Fixed-price tender offer
  • Large scale (15 shares), high premium 16
  • Announcement effect 15
  • Dutch-auction tender offer
  • Open market repurchase program
  • 5 shares, lasting 2 to 3 years
  • Announcement effect 4

3
What do we know about stock repurchases?Types
4
What do we know about stock repurchases?Why?
  • Increase EPS
  • If the drop in earnings is less than the drop in
    the number of shares
  • Can it increase stock price?
  • Is it due to a better use of asset or stock
    repurchase?

5
What do we know about stock repurchases?Why?
  • Signal future cash flow
  • Information revealing needs to be credible
  • Stock repurchase is credible because lying is
    costly
  • Fixed price tender offer
  • More credible, observe earnings improvement
  • Open market repurchase
  • Observe earnings decline

6
What do we know about stock repurchases?Why?
  • Exploit market undervaluation
  • Observe Four year abnormal return is 12.14
  • Concentrates on value stocks (high book-to-market
    value), four year return is 45.29

7
What do we know about stock repurchases?Why?
  • Reduce agency costs of free cash flows
  • Managers can pursue their personal interests
  • Observation 1
  • Tender offer firms have higher levels of cash
  • Announcement effect is higher when excess cash is
    higher
  • Observation 2
  • Announcement effect is higher when operating
    return on investment is lower

8
What do we know about stock repurchases?Why?
  • Reallocate investment among companies
  • Shareholders can reallocate investment more
    efficiently
  • Observation
  • After repurchase, asset is less and capital
    expenditure is less

9
What do we know about stock repurchases?Why?
  • Substitute cash dividend
  • Personal dividend income tax or capital gains
    tax?
  • To maintain stock price (cash dividend will cause
    the stock price to drop)

10
What do we know about stock repurchases?Why?
  • Adjust capital structure
  • To offset share increase from stock options

11
What do we know about stock repurchases?Planning
an open market repurchase
  • Repurchase and stock liquidity
  • Increase informed traders
  • Increase depth
  • Observation
  • Spread declines for less liquid stocks
  • Volatility drops
  • Price drops less with market

12
What do we know about stock repurchases?Planning
an open market repurchase
  • Flexibility and completion rate
  • Will firms mislead the market and repurchase very
    few shares?
  • Disclosure
  • US does not disclose
  • Canada disclose
  • Observation
  • Price increases the most for companies that do
    not repurchase
  • Announcement effect is higher when flexibility is
    more valuable (stock is more volatile)

13
What do we know about stock repurchases?Planning
an open market repurchase
  • Transaction limitations
  • SEC rule 10b-18 in 1982
  • Made through only one broker
  • Not executed at the opening or during the last
    half hour of trading
  • Not done at a price exceeding the highest bid
  • Not exceed 25of average daily volume
  • Black-out dates prohibit insider trading

14
What do we know about stock repurchases?Planning
an open market repurchase
  • Alternatives
  • Buy stocks
  • Buy call options
  • When price is higher, exercise call
  • When price is lower, buy stocks on open market
  • Sell put
Write a Comment
User Comments (0)
About PowerShow.com