Have Investors Benefited from Share Repurchases? Evidence from a Quantitative Timing Study

Abstract

In recent decades, aggregate share repurchase amounts have been rapidly increasing. However, little academic attention has been devoted towards analysing firms’ abilities to time repurchases in a value-creating manner for non-tendering shareholders. Upon creating an advanced timing model, we perform a quantitative sector-wide study of timing abilities among US and EU based firms. In line with Bonaimé, Hankins, Jordan (2016), we find that, for long holding lengths, actual repurchases underperform hypothetical strategies that smooth repurchase dollars through time. However, we show that this conclusion is highly dependent on the underlying assumptions, namely smoothing length, sample period, and our newly introduced variable of holding length. For other combinations of these three variables, the paper provides evidence against the conclusion reached by Bonaimé, Hankins, Jordan (2016).
Moreover, using output generated by the model, the paper shows that specific categories of firms generally possess better timing abilities than others. In a relative framework, the best performing categories of firms over a long time-horizon have high price to book ratios, low financial leverage ratios, a low percentage of institutional shareholders, and low standard deviation among long-term shareholders. Over shorter time horizons, whether firms with high or low price to book and financial leverage ratios possess relatively better timing abilities appear to be highly dependent on the prevailing macroeconomic environment.
The paper discusses possible theoretical explanations for the empirically grounded outperformance. We find that managements of outperforming categories of firms appear to have a relatively high degree of superior private information. Additionally, it appears that firms affected by relatively few debt covenants possess better timing abilities. Lastly, whether firms have experienced relatively good timing abilities during macroeconomic downturns or upswings appears to be highly dependent on firms’ sensitivity to the market.