Acessibilidade / Reportar erro

Underreaction to open market share repurchases* * Article presented at the 13th Brazilian Finance Meeting, Rio de Janeiro, RJ, Brazil, July 2013. ,** ** The authors gratefully acknowledge the financial support provided by the São Paulo Research Foundation (FAPESP), the National Council for Scientific and Technological Development (CNPq) and the Getulio Vargas Foundation’s GVPesquisa to the project that originated this study. The authors also acknowledge the blind reviewers at the Revista Contabilidade & Finanças, and Lucas Barros, Ariovaldo dos Santos, Paulo Terra, Orlando Vilar, Fábio Frezatti and attendees at the 13th Brazilian Finance Meeting, the Research Forum of the Graduate Controlling and Accounting Program at the University of São Paulo School of Economics, Business Administration and Accounting (PPGCC/FEA-USP) and the Finance Research Seminar at the São Paulo School of Business Administration (EAESP-FGV), for their contribution to improve this article.

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.

Keywords
open market stock repurchase; abnormal returns; information; underreaction; long-term returns

Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária Av. Prof. Luciano Gualberto, 908 - prédio 3 - sala 118, 05508 - 010 São Paulo - SP - Brasil, Tel.: (55 11) 2648-6320, Tel.: (55 11) 2648-6321, Fax: (55 11) 3813-0120 - São Paulo - SP - Brazil
E-mail: recont@usp.br