Information Signalling of Common Stock Repurchase Announcements: Australian Evidence
Article Details
Pub. Date
:
March, 2004
Product Name
:
The IUP Journal of Applied Finance
Product Type
:
Article
Product Code
:
IJAF10304
Author Name
:
Samson Ekanayake
Availability
:
YES
Subject/Domain
:
Management
Download Format
:
PDF Format
No. of Pages
:
12
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Description
Stock repurchases (or share buy-backs) have become increasingly popular among Australian companies. One of the main aims of announcing a stock repurchase by a listed company is signalling the market that its shares are currently underpriced. When market reacts to the signal, price of the shares is expected to increase immediately after the announcement. While there are several ways of repurchasing shares, 'on-market buy-backs' is the most popular method of stock repurchases in Australia. Australian listed companies have announced more than two hundred on-market share buy-backs over the past three years. The aim of this paper is to examine the information signalling effects of these on-market buy-back announcements. If the signal is considered positively (negatively) by the market, the price of the repurchasing company's shares should increase (decrease) immediately after the announcement. If there is no information content in the announcement, the price will remain the same. In this study, signalling effect of share buy-back announcements was examined using most recent Australian data.
The total population of on-market buy-back announcements during the period from January 1, 2000 to March 10, 2003 was included. The abnormal market return over the short-run (announcement day and 9 trading days centred on the announcement date) was computed using the All Ordinaries Accumulation Index as the reference portfolio. The daily Abnormal Returns (AR) and Cumulative Abnormal Returns (CAR) during the event period were computed. The results strongly support the information-signalling hypothesis of share buy-backs. Australian market generally considers announcement of on-market share repurchases as signalling of insider information that shares are currently underpriced.
Keywords
Information Signalling ,Common Stock Repurchase, Announcements,price of the shares,repurchasing shares,market share,population, information,Abnormal Returns,Cumulative Abnormal Returns, portfolio,repurchasing shares, on-market share repurchases