p.p1 argue that managers primarily use share

p.p1 {margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica}p.p2 {margin: 0.

0px 0.0px 0.0px 0.0px; font: 8.0px Helvetica}p.p3 {margin: 0.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

0px 0.0px 0.0px 0.0px; font: 11.0px Helvetica}span.s1 {font: 8.0px Helvetica}span.s2 {font: 6.

0px Helvetica}Historically, share repurchases have been an insignificant way of redistributing cash. This isbecause widespread concerns regarding repurchase-related stock price manipulation ledregulators to discourage share repurchases (Jacob & Jacob, 2013). However, over the lastthree decades a great deal of regulatory reform has been introduced which has considerablyimproved a firm’s ability to repurchase its own shares. In effect, share repurchases havebecome increasingly common around the world (Grullon & Ikenberry, 2000). In the UnitedStates for instance, the total value of share repurchases for US firms spiked at around USD600Bn in 2007 compared to approximately USD 40Bn in 1990 (Zeng, 2014). This increase inshare repurchase volumes is also observed outside the US, as many countries includingCanada, France, Germany, Japan and Hong Kong introduced open market repurchases fromthe 1990s onwards. In the first half of the 2000s other European countries followed byengaging in legal reforms to simplify procedures or eradicate tax provisions related to sharerepurchases. As a result, the total value of share repurchases in the European Union increasedfrom EUR 1Bn in 1992 to approximately EUR 58Bn in 2005 (von Eije & Megginson, 2008).

Before 2001, the number of share repurchases carried out in the Netherlands was minimal.Due to several changes in civil law and dividend tax regulation between 2001 and 2008 asignificant growth in open market share repurchase programs was observed. Von Eije andMegginson (2008) for instance find that following reforms, the Netherlands ranked second inthe European Union in the overall value of share repurchases in 2005.

The global increase in the total value of share repurchases reinvigorates discussion asto whether these repurchases actually manipulate stock prices. Various studies argue thatmanagers primarily use share repurchases to signal the relative undervaluation of stocks (e.g.Dann, 1983; Wansley, Lane and Sarkar, 1989; Ikenberry, Lakonishok and Vermaelen, 2000).In opposition to this, regulators have raised renewed concerns regarding the use of sharerepurchases merely as a tool to distort stock prices, undermine price efficiency and in turnincrease managements’ stock performance related compensation1. Busch and Obernberger(2016) address the concerns regarding the distortion of share prices by investigating the1 “Senators Think Stock Buybacks Might Be Manipulative” on Bloomberg (https://www.bloomberg.com /view/articles/2015-06-15/senators-think-stock-buybacks-might-be-manipulative), “Warren decries stock buybacks, high CEO pay” on Boston Globe(https://www.

bostonglobe.com/news/nation/2015/06/04/sen-elizabeth-warren-decries-stock-buybacks-and-high-ceo-pay-seeks-overturnrules/iXvsq8lGI6KOFsFY5w7FUP/story.html). Baldwin Letter to SEC on Baldwin Senate.Gov (https://www.baldwin.senate.gov/imo/media/doc/Baldwin%20Letter%20to%20SEC%204%2023%2015.

pdf), “Aandelen terugkopen, verstandig of niet?” on DeltaLloyd Asset Management (http://www.deltalloydassetmanagement.nl/nl-nl/nieuwsberichten /2013/ 7/aandelen-terugkopen-verstandig-ofniet/)2potential impact of share repurchases on price efficiency in the United States. Their study’smain result is that share repurchases make prices more efficient.

Specifically, sharerepurchases in the US make prices more accurate by providing price support at intrinsicvalues (Busch & Obernberger, 2016).As other stock markets are governed by different legislation and have unique taxenvironments, the perceived impact on price efficiency may differ among countries. It wouldtherefore be interesting to examine whether Busch and Obernberger’s (2016) main findingalso holds in an international context. The Netherlands is an example of a market governedby a different set of rules than the US and thus provides a suitable setting to examine theexternal validity of Busch and Obernberger’s (2016) inferences. This thesis consequentlybuilds on their work by discussing the following research question in the context of theNetherlands:”Do share repurchases improve the informational efficiency of share prices?”A study of open market repurchases in the NetherlandsI address this question by assessing what impact share repurchases have on priceefficiency and the information content of share prices. In particular, I postulate and test twohypotheses originally developed by Busch & Obernberger (2016). The first hypothesis arguesthat various (managerial) incentives for share repurchases increase share prices to levelsabove the intrinsic value (Busch & Obernberger, 2016). When share prices deviate fromintrinsic values, noise is introduced into share prices.

The introduction of noise into shareprices reduces the overall information content and price efficiency of shares. Conversely,Busch and Obernberger (2016) argue that if firms repurchase shares at intrinsic values, shareprices converge to their intrinsic values and price efficiency improves.The second hypothesis states that share repurchases increase either the speed or theaccuracy with which stock prices incorporate information and therefore enhance priceefficiency. According to Busch and Obernberger (2016), the intuition is that sharerepurchases can only reflect positive information about a firm because it intervenes in themarket for its own shares through two distinct channels: market orders and limit orders.

Amarket order entails that shares are repurchased immediately at the prevailing market price. Afirm can therefore instantaneously incorporate information into its stock price byrepurchasing its own shares (Busch & Obernberger, 2016). This means that a market ordercan increase the speed with which positive information is reflected in the stock price. Limitorders on the other hand, imply that firms can increase the accuracy with which information3is reflected in stock prices. Submitting a limit order means that a firm orders to buy its ownstock at a specific price (the limit price). Busch and Obernberger (2016) reason that a limitorder therefore provides a lower bound for a stock’s price. They argue that a repurchasingfirm can increase the accuracy of a stock price, if a limit order provides price support (orlower bound) to reflect its intrinsic value (Busch & Obernberger, 2016).

These distinctchannels provide two means by which share repurchases improve price efficiency.To empirically test the hypotheses, I manually compile a dataset of all sharerepurchases carried out in the Netherlands between the 1st of January 2008 and the 31st ofDecember 2016 based on the AFM register for price sensitive information. Despite being themost comprehensive resource available for share repurchases in the Netherlands, I observe agreat deal of missing transactions. To overcome these gaps, I cross-check the AFM register,company websites and investor relations departments as well as Bloomberg reports to obtainthe relevant transaction information. Using this procedure, I collect the complete weeklytransaction history of 68 open market repurchase programs in the Netherlands. The data Icollect includes the average price paid, the number of shares repurchased and the date on orweek within which the shares were repurchased. My sample includes 30 repurchasing firms,491 program months and 2,713 firm months. This sample represents the first comprehensivedataset on actual repurchases in the Netherlands to date.

I proxy price efficiency and information content by employing two groups ofmeasures for both price delay and idiosyncratic risk. The price delay measures are based onthe relative explanatory power of a simple market model compared to an extended marketmodel including 5 lags for market returns. The idea is that one observes greater price delaysin the incorporation of new information, if the extended market model has greaterexplanatory power than the simple market model (Hou & Moskowitz, 2005). This price delaydecreases when share repurchases improve the speed with which information is assimilatedinto share prices. The idiosyncratic risk measures quantify whether share price movestogether with the market. I use the R-squared between the simple and extended market modelas well as the absolute market correlation between stock and market returns to proxy foridiosyncratic risk.

When share prices increasingly co-move with the market the relativeamount of idiosyncratic risk declines. This implies that if share repurchase introduce noiseinto share prices the idiosyncratic risk of a stock increases and the information contentdeclines (Busch & Obernberger, 2016).I use the manually collected weekly repurchase transaction data to construct twomeasures of repurchase activity originally theorized by Busch & Obernberger (2016). The4first measure envelopes the monthly number of shares repurchased scaled by the total numberof shares outstanding in the previous month.

The second measure approximates the remainingnumber of shares that can be bought within the program scaled by the number of sharesoutstanding at the beginning of the program. I furthermore incorporate firm fixed effects andtime effects to guarantee that my results are no affected by heterogeneity or macro-economicfactors (Busch & Obernberger, 2016).I find that share repurchases decrease price delay in program months and thereforeconclude that repurchases make prices more efficient when using lagged RepurchaseIntensity as a proxy for repurchase activity. I also infer that the co-movement between sharesand the market increases upon repurchases, as evidenced by a higher R-squared and marketcorrelation when using lagged Repurchase Intensity.

This result entails that a share’s relativeidiosyncratic risk is lower when the lagged Repurchase Intensity is higher. My evidencetherefore contradicts the idea that share repurchases introduce noise into stock returns. Iextend my analysis to learn more about the mechanism that induces the improvement in priceefficiency and the reduction of idiosyncratic risk. I sub-divide the sample into up markets(positive market returns) and down markets (negative market returns) to constitute whetherpositive or negative systematic information comes to the market in repurchase months. If theresults are strongest in the up market sub-sample, I can establish that firms actively trade intheir own shares to increase the speed by which positive information is incorporated intoshare prices (Busch & Obernberger, 2016). If the results are strongest in the down market, Ican infer that firms repurchase at intrinsic value to increase the accuracy by which negativeinformation is incorporated into share prices. I find that the results for price efficiency andidiosyncratic risk are strongest in down market months when negative information comes tothe market. I deduce that share repurchases predominantly increase price efficiency andinformation content by providing price support at intrinsic values.

I also conduct some additional tests to identify whether subsets of repurchases basedon distinctive motivations for a repurchase program have a differential impact on priceefficiency. This analysis consists of two parts: a study of announcement returns and a studyof actual repurchase behavior. I find that firms announcing a repurchase program to alter theircapital structure or distribute excess cash experience positive abnormal returns and concludethat information is temporarily incorporated into stock prices upon repurchaseannouncements.

Next, I interact a dummy for motivation with actual repurchase activity andfind that firms carrying out repurchases to adjust the capital structure increase the priceefficiency and reduce the idiosyncratic risk of their share prices. Moreover, I find that firms5conducting repurchases to distribute excess cash actually harm price efficiency. Thesesignificant relationships are however only observed when using contemporaneousRepurchase Intensity to proxy for actual repurchases. In sum, this approach reveals howparticular types of information impact price efficiency differently.I contribute to the literature in three particular ways. First, relatively little research hasbeen conducted on share repurchases in the Netherlands.

In fact, this thesis presents the firststudy of actual repurchases in the Netherlands. Repurchase transaction data is not readilyavailable and must be hand-collected in the Netherlands. The final dataset therefore providesan invaluable addition to the growing body of data concerning the Dutch financial market ingeneral, and share repurchases in particular. The second key contribution is that this thesisadds to the relatively uncharted field of the impact of share repurchase activity on priceefficiency. Busch & Obernberger (2016) are the only authors to have investigated thisrelationship to date.

Lastly, I provide a novel approach to study share repurchase activity, bycollecting and investigating the motivation to conduct repurchases and assessing whether thedistinctive motivations impact repurchase activity and price efficiency differently.The rest of this thesis is organized as follows. Chapter 2 presents a detailed outline ofthe basics of share repurchases, a summary of the key regulations governing sharerepurchases in the Netherlands as well as a review of the key strands of academic literatureconcerned with share repurchases. Chapter 3 subsequently discusses the formation of two keyhypotheses, which collectively aid the investigation of the impact of share repurchases onprice efficiency. Chapter 4 next details the construction of the final dataset as well as themethodology used in this thesis. Chapter 5 reports the empirical results and relates thefindings to previous research.

Chapter 6 connects the key findings of this thesis to formulate aconclusion. Lastly, Chapter 7 debates some of the key limitations of the method andmethodology used in this thesis as well as proposes certain recommendations for futureresearch.


I'm Mary!

Would you like to get a custom essay? How about receiving a customized one?

Check it out