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Economic Sources of Gain in Stock Repurchases

Previous studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run per...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2004-09, Vol.39 (3), p.461-479
Main Authors: Chan, Konan, Ikenberry, David, Lee, Inmoo
Format: Article
Language:English
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Summary:Previous studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run performance. The initial reaction provides some support for the mispricing story. However, subsequent earnings-related information shocks suggest that the initial market reaction is incomplete and that long-run performance may be informative. The long-horizon return evidence is most consistent with the mispricing hypothesis and, to some degree, the free cash flow hypothesis. We find little support for the leverage hypothesis.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109000003987