Where Lies the signaling effect of the SRP? Announcement vs. execution.(ANTHOLOGY)

Kracher and Johnson (1997 "Repurchase Announcements, Lies and False Signals," Journal of Business Ethics, vol. 16, pp. 1677-1685) argue that companies announcing Share Repurchase Program (SRP) with no intention of repurchasing shares are guilty of either lying or sending false signals. One unique feature of stock repurchase regulation in Taiwan is that the listed firms are required to file a formal execution report within two calendar months following the expiration date. Owing to this distinctive stipulation, we have detailed authorized versus actual repurchase data to observe the execution effect as well as the announcement effect associated with stock repurchase programs on shareholder wealth.

Our sample is composed of the Taiwan Stock Exchange (TSE) listed fn-ms which have announced SRP during the period from August 7, 2000 through December 31, 2001. The date of August 7, 2000 is chosen as the starting date because it is the date that stock repurchase regulations in Taiwan was promulgated and enforced. As for choosing December 31, 2001 as the ending date, it is dictated by latest data availability when the senior author of the present study was commissioned by the National Science Council, Taiwan to undertake such a research project (NSC: 90-2416-H-324-001). The authors collected data from 199 firms with 440 SRP announcements.

Based on the entire sample, it was found that the cumulative average residuals (CARs) are both positive and statistically significant in the period 0 ~ +2 , the date of the announcement and 2 days after. The empirical findings demonstrate that the firms using the announcement as a signal are successful in convincing investors that the intrinsic value of their stocks are higher than the prices in the pre-announcement period, and, effectively, in bringing about a drastic 2.97% increase stock prices in the period 0 ~ +2 and an even more dramatic 11.92% increase in the period 0 ~ +60. In other words, the empirical findings fall in line with the signaling arguments as advanced by Vermaelen (1981 "Common Stock Repurchase and Market Signaling: An Empirical Study," Journal of Financial Economics, vol. 9, pp. 139-183).

The present study applies the cumulative execution rates to measure the execution effect reflecting a larger shift in the supply of stock for TSE-listed firms launching a SRP. Given authorized shares to repurchase, we expect the higher cumulated execution rate firms--defined as firms repurchasing a larger cumulative shares relative to the total outstanding shares--will register higher CARs when compared with the lower cumulated execution rate firms repurchasing a smaller percentage of outstanding shares. The 199 initial SRP finns are divided into four quartiles. We define the 50 highest accumulated execution rate sample firms to be the higher cumulative execution tate group and the 50 lowest cumulative execution rate sample firms to be the lower cumulative execution rate group. The cumulated execution rates are ranged from 5.26% ~ 22.48% and ranged from 0.00% ~ 1.39% for the higher and lower cumulative execution rate groups respectively. Statistically speaking, the CARs of the sample firms repurchasing a larger cumulative percentage of outstanding shares were significantly higher (5.04% in the period 0 ~ +2; enlarged to 20.60% in the period 0 ~ +60) when compared with the sample firms repurchasing a smaller cumulative percentage of outstanding shares (4.23% in the period 0 ~ +2; enlarged to 18.57% in the period 0 ~ +60). More importantly, either the larger cumulative execution rate group or the smaller cumulative execution rate group, were associated with a positive and statistically significant increase in stock prices.

Based on the empirical findings, the present study therefore concludes that both announcement and execution effects of SRP have some role to play in explaining shareholder wealth gains associated with the stock repurchase plans.

JEL G30. G35

Published online: 15 October 2008

G. Yen ([mail])

Department of Business Administration, Chaoyang University of Technology, No. 168, Jifong E. Rd., Wufong 41349 Taichung County, Taiwan, Republic of China

e-mail: gyen@cyut.edu.tw

E. C. Yen

Department of Business Administration, National Central University, No. 300, Jhongda Rd., Jhongli 32001 Taoyuan County, Taiwan, Republic of China

e-mail: chchlin@mgt.ncu.edu.tw

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