Information Signalling of Share Buy-Back Announcements - Recent Australian Evidence

Samson Ekanayake ()
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Samson Ekanayake: Deakin University, http://www.deakin.edu.au/buslaw/aef/staff/profiles/ekanayake.php

No 2004_16, Accounting, Finance, Financial Planning and Insurance Series from Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance

Abstract: Share buy-backs have become increasingly popular among Australian companies. One of the main aims of announcing a share buy-back 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 buying back shares, ‘on-market buy-backs’ is the most popular method of buying back shares 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. 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 1 January 2000 to 10 March 2003 was examined in this study. 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: Stock repurchases; Australian share buy-backs; signalling; short-term price reaction (search for similar items in EconPapers)
Date: 2004-10-05
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