THE LONG-TERM WEALTH EFFECT OF SHARE REPURCHASES EVIDENCE FROM TAIWAN

Tai-Yuan Chen (), Lie-Jane Kao and Hsing-Yu Lin

The International Journal of Business and Finance Research, 2011, vol. 5, issue 2, 21-33

Abstract: This paper examines the long-term wealth effect of 948 share repurchase announcements in the Taiwan market. We also investigate what factors determine the wealth effect of share repurchases. Our findings show that share repurchases induce positive buy-and-hold abnormal returns during the 12-month post-announcement period. Undervaluation and unexpected operating profits are the two important factors explaining the wealth effect regardless of firms’ investment opportunities. In addition, for firms with poor investment opportunities, estimated repurchase ratio also explains the wealth effect for the two-month period after repurchase announcements but not for the long-term. By contrast, this study does not find the explanatory power of the changes in free cash flow on either the short- or the long-term wealth. The overall evidence supports the undervaluation and the signaling hypotheses, rather than the free cash flow hypothesis.

Keywords: Share Repurchase; Abnormal Return; Undervaluation; Signaling; Agency Theory (search for similar items in EconPapers)
JEL-codes: G14 G35 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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