Share Buyback and Equity Issue Anomalies Revisited
We re examine the behavior of stock returns after share buyback and equity issuance announcements using the five factor model proposed by Fama and French (2015a) We confirm the findings of Fama and French (2015b) that the equity issue anomaly, i.e. the fact that equity issues are followed by negative long term excess returns, disappears after replacing the Fama and French (1993) three factor model with the five factor model. However, long term positive excess returns after buyback announcements, first reported by Ikenberry, Lakonishok, and Vermaelen (1995) remain economically and statistically significant. Moreover, the Undervaluation Index proposed by Peyer and Vermaelen (2009) remains a useful proxy for the likelihood that the buyback is driven by undervaluation. The buyback anomaly is robust over time and across sectors. Firms with low correlations with the market seem to be better at market timing, which is consistent with the hypothesis that the repurchase is driven by superior companyspecific information. Firms with high pre announce stock returns volatility also have higher abnormal returns, which is consistent with the hypothesis that a repurchase authorization is an option to take advantage of undervaluation as argued by Ikenberry and Vermaelen (1996) This result is also consistent with Stambaugh, Yu, and Yuan (2015) who find a positive relation between stock returns and idiosyncratic volatility for undervalued stocks, and unlike the well known low volatility anomaly. Finally, based on these findings, we develop an enhanced Undervaluation Index that improves abnormal returns relative to the index developed by Peyer and Vermaelen (2009) JEL classification: G35