Effects of the pre-repurchase systematic risk on the relationship between investor behavior, market factors and the stock price responses
Abstract
This study explores the pre-repurchase systematic risk will affect the abnormal returns in the open-market repurchase event period and also change the relationship between the investor sentiment, trading activity, market factors and stock price response during the event on Taiwan stock market. Based on threshold regression models, it is found that the pre-repurchase systematic risk will significantly change the relationship between investor behavior, market factors and stock price responses and the asymmetry of the relationship exists when pre-repurchase systematic risk is lower than a repartition, which supports that institutional investors and credit trading investors differ in these existing relationships. When the pre-repurchase beta is below repartition, it will be detrimental to the returns in event period. But on the contrary, the returns in the short-term shock of news exposure period present the favorable results, which may be related to the fact that there exists sentiment premium in short-term when credit trading investors’ repurchase news exposure occurs. Finally, the study is to confirm the effect of systematic risk for returns and investor sentiment, these results have not been further explored in the past, and can be used as the firm’s evalu-ation reference to the repurchase program in the future.
Keyword : the open-market share repurchases, investor sentiment, stock price responses, the pre-repurchase beta, asymmetry of the relationship, the threshold regression model
How to Cite
Liu, Y.-S. (2018). Effects of the pre-repurchase systematic risk on the relationship between investor behavior, market factors and the stock price responses. Journal of Business Economics and Management, 19(4), 673-691. https://doi.org/10.3846/jbem.2018.6840
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Babenko, I., Tserlukevich, Y., & Vedrashko, A. (2012). The credibility of open market share repurchase signaling. Journal of Financial and Quantitative Analysis, 47(5), 1059-1088. https://doi.org/10.1017/S0022109012000312
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Chen, C. P., & Liu, Y. S. (2018). The impacts of investor sentiment and price uncertainty on the effects of open-market share repurchase announcements. Applied Economics letters, 25(11), 730-733. https://doi.org/10.1080/13504851.2017.1361002
Chen, H. C., Chen, S. S., Huang, C. W., & Schatzberg, J. D. (2014). Insider trading and firm performance following open market share repurchase announcements. Journal of Business Finance and Accounting, 41(1-2), 156-184. https://doi.org/10.1111/jbfa.12059
Cheng, L. Y., & Lin, Y. E. (2012). Institutional investment horizons and open-market stock repurchases: evidence from the Taiwan stock market. Applied Financial Economics, 22(8), 611-623. https://doi.org/10.1080/09603107.2011.621878
Cheng, S. Y., & Hou, H. (2013). The information content of open-market repurchase announcements in Taiwan. Journal of International Financial Markets, Institutions and Money, 27, 59-75. https://doi.org/10.1016/j.intfin.2013.07.010
Cheng, S. Y., & Hou, H. (2017). Institutional investors and the credibility of open market repurchases in illiquid markets: evidence from Taiwan. Spanish Journal of Finance and Accounting, 46(2), 168-188. https://doi.org/10.1080/02102412.2016.1260255
Dunn, J. K., Fayman, A., & McNutt, J. J. (2011). An empirical examination of the stated purposes of issuer tender offers to purchase common stock. Financial Management, 40(4), 941-972. https://doi.org/10.1111/j.1755-053X.2011.01167
Fei Leng, G. N. (2013). Information and long-term stock performance following open-market share repurchases. Financial Review, 48(3), 461-487. https://doi.org/10.1111/fire.12011
Ginglinger, E., & L’her, J. F. (2006). Ownership structure and open market stock repurchases in France. European Journal of Finance, 12(1), 77-94. https://doi.org/10.1080/13518470500039543
Golbe, D. L., & Nyman, I. (2013). How do share repurchases affect ownership concentration? Journal of Corporate Finance, 20, 22-40. https://doi.org/10.1016/j.jcorpfin.2012.11.002
Gong, G., Louis, H., & Sun, A. (2008). Earnings management and firm performance following open-market repurchases. Journal of Finance, 63(2), 947-986. https://doi.org/10.1111/j.1540-6261.2008.01336.x
Grullon, G., & Michaely, R. (2004). The information content of share repurchase programs. Journal of Finance, 59(2), 651-680. https://doi.org/10.1111/j.1540-6261.2004.00645.x
Ha, I., Hong, G., & Lee, B. S. (2011). Information content of dividends and share repurchases. Asia-Pacific Journal of Financial Studies, 40(4), 517-549. https://doi.org/10.1111/j.2041-6156.2011.01048.x
Hsu, Y. T., & Huang, C. W. (2016). Idiosyncratic risk and share repurchases. Finance Research Letters, 18, 76-82. https://doi.org/10.1016/j.frl.2016.04.003
Huang, C. W. (2015). Takeover vulnerability and the credibility of signaling: the case of open-market share repurchases. Journal of Banking and Finance, 58, 405-417. https://doi.org/10.1016/j.jbankfin.2015.04.022
Huang, G. C., Liano, K., Manakyan, H., & Pan, M. S. (2013). Open-market stock repurchases by insurance companies and signaling. Risk Management and Insurance Review, 16(1), 47-69. https://doi.org/10.1111/rmir.12003
Jagannathan, M., & Stephens, C. P. (2003). Motives for multiple open-market repurchase programs. Financial Management, 32(2), 71-91. https://doi.org/10.2307/3666337
Jain, R. (2007). Institutional and individual investor preferences for dividends and share repurchases. Journal of Economics and Business, 59(5), 406-429. https://doi.org/10.1016/j.jeconbus.2007.04.004
Jategaonkar, S. P. (2013). If it’s good for the firm, It’s good for me: Insider trading and repurchases motivated by undervaluation. Financial Review, 48(2), 179-203. https://doi.org/10.1111/fire.12000
Kumar, A., & Lee, C. M. C. (2006). Retail investor sentiment and return comovements. Journal of Finance, 61(5), 2451-2486. https://doi.org/10.1111/j.1540-6261.2006.01063.x
Leng, F., & Zhao, K. M. (2014). Insider trading around open-market share repurchases. Journal of Economics and Finance, 38(3), 461-491. https://doi.org/10.1007/s12197-012-9227-x
Li, L. (2016). New findings on repurchase anomaly – the first-month effect. International Review of Financial Analysis, 48, 331-349. https://doi.org/10.1016/j.irfa.2015.05.023
Liang, W. l. (2016). Sensitivity to investor sentiment and stock performance of open market share repurchases. Journal of Banking and Finance, 71, 75-94. https://doi.org/10.1016/j.jbankfin.2016.06.003
Lin, J. C., Stephens, C. P., & Wu, Y. (2014). Limited attention, share repurchases, and takeover risk. Journal of Banking and Finance, 42, 283-301. https://doi.org/10.1016/j.jbankfin.2014.02.004
Liu, H., & Swanson, E. P. (2016). Is price support a motive for increasing share repurchases? Journal of Corporate Finance, 38, 77-91. https://doi.org/10.1016/j.jcorpfin.2016.03.011
Mishra, D., Racine, M. D., & Schmidt, L. (2011). Credibility of corporate announcements and market reaction: evidence from Canadian share repurchase programs. Canadian Journal of Administrative Sciences, 28(1), 83-100. https://doi.org/10.1002/cjas.127
Sheu, H. J., & Cheng, C. L. (2012). Systemic risk in Taiwan stock market. Journal of Business Economics and Management, 13(5), 895-914. https://doi.org/10.3846/16111699.2011.620168
Su, N. H., & Lin, C. J. (2012). The impact of open-market share repurchases on long-term stock returns: evidence from the Taiwanese Market. Emerging Markets Finance and Trade, 48(2), 200-229. https://doi.org/10.2753/REE1540-496X48S212
Wang, C. S., Strong, N., Tung, S., & Lin, S. (2009). Share repurchases, the clustering problem, and the free cash flow hypothesis. Financial Management, 38(3), 487-505. https://doi.org/10.1111/j.1755-053X.2009.01045.x
Zhang, H. (2005). Share price performance following actual share repurchases. Journal of Banking and Finance, 29(7), 1887-1901. https://doi.org/10.1016/j.jbankfin.2004.06.038
Andriosopoulos, D., & Lasfer, M. (2015). The market valuation of share repurchases in Europe. Journal of Banking and Finance, 55, 327-339. https://doi.org/10.1016/j.jbankfin.2014.04.017
Babenko, I., Tserlukevich, Y., & Vedrashko, A. (2012). The credibility of open market share repurchase signaling. Journal of Financial and Quantitative Analysis, 47(5), 1059-1088. https://doi.org/10.1017/S0022109012000312
Bai, J., & Perron, P. (2003). Critical values for multiple structural change tests. Econometrics Journal, 6, 72-78. https://doi.org/10.1111/1368-423X.00102
Bonaimé, A. A., & Ryngaert, M. D. (2013). Insider trading and share repurchases: do insiders and firms trade in the same direction? Journal of Corporate Finance, 22, 35-53. https://doi.org/10.1016/j.jcorpfin.2013.03.003
Caton, G. L., Goh, J., Lee, Y. T., & Linn, S. C. (2016). Governance and post-repurchase performance. Journal of Corporate Finance, 39, 155-173. https://doi.org/10.1016/j.jcorpfin.2016.02.005
Chen, C. P., & Liu, Y. S. (2018). The impacts of investor sentiment and price uncertainty on the effects of open-market share repurchase announcements. Applied Economics letters, 25(11), 730-733. https://doi.org/10.1080/13504851.2017.1361002
Chen, H. C., Chen, S. S., Huang, C. W., & Schatzberg, J. D. (2014). Insider trading and firm performance following open market share repurchase announcements. Journal of Business Finance and Accounting, 41(1-2), 156-184. https://doi.org/10.1111/jbfa.12059
Cheng, L. Y., & Lin, Y. E. (2012). Institutional investment horizons and open-market stock repurchases: evidence from the Taiwan stock market. Applied Financial Economics, 22(8), 611-623. https://doi.org/10.1080/09603107.2011.621878
Cheng, S. Y., & Hou, H. (2013). The information content of open-market repurchase announcements in Taiwan. Journal of International Financial Markets, Institutions and Money, 27, 59-75. https://doi.org/10.1016/j.intfin.2013.07.010
Cheng, S. Y., & Hou, H. (2017). Institutional investors and the credibility of open market repurchases in illiquid markets: evidence from Taiwan. Spanish Journal of Finance and Accounting, 46(2), 168-188. https://doi.org/10.1080/02102412.2016.1260255
Dunn, J. K., Fayman, A., & McNutt, J. J. (2011). An empirical examination of the stated purposes of issuer tender offers to purchase common stock. Financial Management, 40(4), 941-972. https://doi.org/10.1111/j.1755-053X.2011.01167
Fei Leng, G. N. (2013). Information and long-term stock performance following open-market share repurchases. Financial Review, 48(3), 461-487. https://doi.org/10.1111/fire.12011
Ginglinger, E., & L’her, J. F. (2006). Ownership structure and open market stock repurchases in France. European Journal of Finance, 12(1), 77-94. https://doi.org/10.1080/13518470500039543
Golbe, D. L., & Nyman, I. (2013). How do share repurchases affect ownership concentration? Journal of Corporate Finance, 20, 22-40. https://doi.org/10.1016/j.jcorpfin.2012.11.002
Gong, G., Louis, H., & Sun, A. (2008). Earnings management and firm performance following open-market repurchases. Journal of Finance, 63(2), 947-986. https://doi.org/10.1111/j.1540-6261.2008.01336.x
Grullon, G., & Michaely, R. (2004). The information content of share repurchase programs. Journal of Finance, 59(2), 651-680. https://doi.org/10.1111/j.1540-6261.2004.00645.x
Ha, I., Hong, G., & Lee, B. S. (2011). Information content of dividends and share repurchases. Asia-Pacific Journal of Financial Studies, 40(4), 517-549. https://doi.org/10.1111/j.2041-6156.2011.01048.x
Hsu, Y. T., & Huang, C. W. (2016). Idiosyncratic risk and share repurchases. Finance Research Letters, 18, 76-82. https://doi.org/10.1016/j.frl.2016.04.003
Huang, C. W. (2015). Takeover vulnerability and the credibility of signaling: the case of open-market share repurchases. Journal of Banking and Finance, 58, 405-417. https://doi.org/10.1016/j.jbankfin.2015.04.022
Huang, G. C., Liano, K., Manakyan, H., & Pan, M. S. (2013). Open-market stock repurchases by insurance companies and signaling. Risk Management and Insurance Review, 16(1), 47-69. https://doi.org/10.1111/rmir.12003
Jagannathan, M., & Stephens, C. P. (2003). Motives for multiple open-market repurchase programs. Financial Management, 32(2), 71-91. https://doi.org/10.2307/3666337
Jain, R. (2007). Institutional and individual investor preferences for dividends and share repurchases. Journal of Economics and Business, 59(5), 406-429. https://doi.org/10.1016/j.jeconbus.2007.04.004
Jategaonkar, S. P. (2013). If it’s good for the firm, It’s good for me: Insider trading and repurchases motivated by undervaluation. Financial Review, 48(2), 179-203. https://doi.org/10.1111/fire.12000
Kumar, A., & Lee, C. M. C. (2006). Retail investor sentiment and return comovements. Journal of Finance, 61(5), 2451-2486. https://doi.org/10.1111/j.1540-6261.2006.01063.x
Leng, F., & Zhao, K. M. (2014). Insider trading around open-market share repurchases. Journal of Economics and Finance, 38(3), 461-491. https://doi.org/10.1007/s12197-012-9227-x
Li, L. (2016). New findings on repurchase anomaly – the first-month effect. International Review of Financial Analysis, 48, 331-349. https://doi.org/10.1016/j.irfa.2015.05.023
Liang, W. l. (2016). Sensitivity to investor sentiment and stock performance of open market share repurchases. Journal of Banking and Finance, 71, 75-94. https://doi.org/10.1016/j.jbankfin.2016.06.003
Lin, J. C., Stephens, C. P., & Wu, Y. (2014). Limited attention, share repurchases, and takeover risk. Journal of Banking and Finance, 42, 283-301. https://doi.org/10.1016/j.jbankfin.2014.02.004
Liu, H., & Swanson, E. P. (2016). Is price support a motive for increasing share repurchases? Journal of Corporate Finance, 38, 77-91. https://doi.org/10.1016/j.jcorpfin.2016.03.011
Mishra, D., Racine, M. D., & Schmidt, L. (2011). Credibility of corporate announcements and market reaction: evidence from Canadian share repurchase programs. Canadian Journal of Administrative Sciences, 28(1), 83-100. https://doi.org/10.1002/cjas.127
Sheu, H. J., & Cheng, C. L. (2012). Systemic risk in Taiwan stock market. Journal of Business Economics and Management, 13(5), 895-914. https://doi.org/10.3846/16111699.2011.620168
Su, N. H., & Lin, C. J. (2012). The impact of open-market share repurchases on long-term stock returns: evidence from the Taiwanese Market. Emerging Markets Finance and Trade, 48(2), 200-229. https://doi.org/10.2753/REE1540-496X48S212
Wang, C. S., Strong, N., Tung, S., & Lin, S. (2009). Share repurchases, the clustering problem, and the free cash flow hypothesis. Financial Management, 38(3), 487-505. https://doi.org/10.1111/j.1755-053X.2009.01045.x
Zhang, H. (2005). Share price performance following actual share repurchases. Journal of Banking and Finance, 29(7), 1887-1901. https://doi.org/10.1016/j.jbankfin.2004.06.038