Payout Policy Trade-Offs and the Rise of 10b5-1 Preset Repurchase Plans

2020 ◽  
Vol 66 (6) ◽  
pp. 2762-2786 ◽  
Author(s):  
Alice Bonaimé ◽  
Jarrad Harford ◽  
David Moore
Keyword(s):  
Insider Trading ◽  
Payout Policy ◽  
Open Market ◽  
Firm Level ◽  
Financial Flexibility ◽  
Market Reactions ◽  
Company Stock ◽  
Trade Offs ◽  
Repurchase Announcements ◽  
Buy Back

We are the first to document and study the use of Rule 10b5-1 preset repurchase plans. Though the rule’s original intent was to clarify conditions for enforcing insider trading laws, generally thought to apply to individuals classified as firm insiders, we find strong use of the rule at the firm level to repurchase company stock. We exploit this new and widespread form of payout to examine an issue at the core of payout decisions—the trade-off between commitment and financial flexibility. Relative to open market repurchases, preset plans provide an expanded repurchase window and increased legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption: Firms with alternative sources of financial flexibility are more likely to precommit to a repurchase plan, as are firms with a history of poor repurchase timing and firms constrained by blackout windows. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates, with more positive market reactions, and with more dividend substitution than open market repurchases. Lastly, we find that preset repurchase plans represent a unique payout tool whose introduction encouraged a different set of firms to buy back stock and significantly altered the payout landscape. This paper was accepted by David Simchi-Levi, Editor-in-Chief.

Testing the Real Option Hypothesis on the Declining Open-Market Repurchase Announcement Returns

2020 ◽  
Vol 23 (03) ◽  
pp. 2050024
Author(s):  
David K. Ding ◽  
Hardjo Koerniadi ◽  
Chandrasekhar Krishnamurti
Keyword(s):  
Financial Management ◽  
Real Option ◽  
Open Market ◽  
Market Reactions ◽  
The Real ◽  
Announcement Returns ◽  
Repurchase Announcements

Recent studies report that open-market repurchase announcements have become less attractive to stock investors. This study documents that lower announcement returns are attributed to subsequent repurchase announcements, which have increased in number in recent years. Using the real-option-to-delay framework proposed by Ikenberry, D and T Vermaelen (1996). The option to repurchase stock. Financial Management, 25, 9–24, this study finds evidence consistent with decreasing value of the option to repurchase shares prior to subsequent open-market repurchase announcements. This explains the decreasing market reactions to such announcements.

scholarly journals Underreaction to open market share repurchases,

2019 ◽  
Vol 30 (80) ◽  
pp. 172-185 ◽  
Author(s):  
F. Henrique Castro ◽  
Claudia Yoshinaga
Keyword(s):  
Factor Model ◽  
Abnormal Returns ◽  
Open Market ◽  
Stock Repurchase ◽  
Long Run ◽  
Average Abnormal Return ◽  
Fama And French ◽  
Repurchase Announcements ◽  
Buy Back ◽  
Term Performance

ABSTRACT This article aims to investigate the long-term performance of a portfolio of firms that announced the repurchase of their own stocks in the Brazilian market from 2003 to 2014. Open market stock repurchase is a means to distribute cashflow to shareholders. Some of the reasons for a firm to buy back its own stocks are: to adjust its capital structure; to reduce excessive cash levels; as an alternative to dividends; and signaling to the market in order to reduce information asymmetry between the firm and its investors. If the signaling hypothesis is true, then forming a portfolio with shares that announce repurchases generates abnormal returns in the long run. Our results show that repurchase announcements in the open market signal stock underpricing, and abnormal returns can be earned using this strategy. Results are inconsistent with the semi-strong form of the efficient markets hypothesis, which states that one cannot earn abnormal returns with publicly available information. We obtained abnormal returns using the capital asset pricing model (CAPM) and Fama and French three-factor model. Additionally, we divided the sample in growth and value firms. We found that the average abnormal return for firms that announce repurchase programs ranges from 5.4% to 7.9% for up to a 3-year period after the announcement. For value companies (more likely to repurchase stocks due to undervaluation), abnormal returns can reach up to 11.5% per year.

Institutional investment in repurchase stocks: insider trading information

2020 ◽  
Vol 46 (10) ◽  
pp. 1305-1319
Author(s):  
Jin-Ying Wang
Keyword(s):  
Insider Trading ◽  
Private Information ◽  
Public Information ◽  
International Investment ◽  
Share Repurchase ◽  
Open Market ◽  
Institutional Trading ◽  
Excess Returns ◽  
Firm Level ◽  
Content Type

PurposeThis study explores whether institutional investors can distinguish an undervalued share repurchase from a falsely signaled share repurchase. This study also aims to determine what information institutions use when investing in repurchase stocks.Design/methodology/approachThis study uses unique Taiwanese data and concentrates on foreign institutions because they are the most sophisticated investors in Taiwan.FindingsThe results show that foreign institutional trading in open market repurchase (OMR) stocks will earn both positive concurrent and post-OMR excess returns. In addition, there is a significant positive relationship between pre-OMR insider trading and foreign institutional trading during the OMR period; that is, foreign institutions follow insiders to trade their OMR stocks.Practical implicationsThis study finds that foreign institutions use publicly available data on insider trading to choose OMR stocks and create excess returns. This encourages individual investors without private information, who can also earn a positive return if they diligently study available public information.Originality/valueThis study contributes to the international investment literature by determining the price impacts associated with foreigner trading in the firm-level returns of the host country. In addition, this study finds that foreign institutions choose OMRs based on insider trading information, which fills the gap in existing studies on share repurchasing. Moreover, this study enriches the insider literature by showing how foreign institutions can benefit by using insider trading information.

Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements

2014 ◽  
Vol 41 (1-2) ◽  
pp. 156-184 ◽  
Author(s):  
Hsuan-Chi Chen ◽  
Sheng-Syan Chen ◽  
Chia-Wei Huang ◽  
John D. Schatzberg
Keyword(s):  
Firm Performance ◽  
Market Share ◽  
Insider Trading ◽  
Share Repurchase ◽  
Open Market ◽  
Repurchase Announcements

Managerial Responses to Initial Market Reactions on Share Repurchases

2009 ◽  
Vol 12 (03) ◽  
pp. 455-474 ◽  
Author(s):  
Hung-Kun Chen ◽  
Yan-Shing Chen ◽  
Chia-Wei Huang ◽  
Yanzhi Wang
Keyword(s):  
Market Share ◽  
Share Repurchases ◽  
Share Repurchase ◽  
Open Market ◽  
Market Reactions ◽  
True Value ◽  
Long Run ◽  
The Moment ◽  
Buy Back ◽  
Timing Hypothesis

While most papers in finance literature investigate how the stock market reacts to announcements of corporate events, very few study the opposite, how namely, the manager responds to the information from outside investors. In this paper, we examine this issue, using open market share repurchases. Open market share repurchase offers flexibility for the manager to decide whether or not to buy back shares. Therefore, the manager may refer to the opinions of outside investors and make the decision, based on actual buyback activities. We propose learning, over-confidence and timing hypotheses to interpret the behavior of the managerial response to initial market reaction on the share repurchase announcement. Empirically, if a repurchase announcement abnormal return is low, then the manager tends to achieve the repurchase announced ratio by purchasing more shares. In addition, the investor will positively react to this repurchase in the long run. These empirical findings are consistent with the market timing hypothesis, which implies that managers know the true value of their firms better than the market at the moment of the share repurchase announcement.

scholarly journals Measuring the agency costs of dispersed ownership: the case of repurchase initiations

2014 ◽  
Vol 11 (3) ◽  
pp. 30-49
Author(s):  
Ruth Gesser ◽  
Rony Halman ◽  
Oded Sarig
Keyword(s):  
Stock Prices ◽  
Media Coverage ◽  
Agency Costs ◽  
Market Reaction ◽  
Cash Flows ◽  
Payout Policy ◽  
Conclusive Evidence ◽  
Market Reactions ◽  
Repurchase Announcements ◽  
Dispersed Ownership

Empirical investigations of the agency costs of dispersed ownership yield mixed results. A possible explanation for the lack of conclusive evidence is inaccurate measurement of the extent of the problem. We suggest that the extent of the problem be measured as theory suggests: by the wealth that managers commit to their firms. We examine the relative performance of different measures of the agency problem of dispersed ownership in the context of changes in payout policy affected by repurchase initiations. We find that the suggested measure – managerial equity wealth – can explain better than any other measure the market reaction to repurchase initiations. We also find that market reaction to repurchase initiation is smaller for firms with high media coverage than for firms with low media coverage and that repurchases that follow a large rise in stock prices elicit relatively small market reactions. Lastly, we find that market reaction to repurchase announcements decreases with the dividend yield of the firm, which suggests that share repurchases are relatively less important when dividends are used to alleviate the problems of free cash flows. Our results are robust to several modifications of the main test.

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