Economic Sources of Gain in Stock Repurchases

Konan Chan, David Ikenberry and Inmoo Lee

Journal of Financial and Quantitative Analysis, 2004, vol. 39, issue 3, 461-479

Abstract: Previous studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run performance. The initial reaction provides some support for the mispricing story. However, subsequent earnings-related information shocks suggest that the initial market reaction is incomplete and that long-run performance may be informative. The long-horizon return evidence is most consistent with the mispricing hypothesis and, to some degree, the free cash flow hypothesis. We find little support for the leverage hypothesis.

Date: 2004
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