Do share buybacks create value for the shareholders? An empirical test of the absolute and relative returns of share buybacks conducted by Danish companies between 2000 and 2010

Lars Manor Paulsen

Student thesis: Master thesis


This thesis analyses share buyback conducted by Danish companies during 2000 to 2010. Share buybacks has become increasingly popular and so it is of interest for the shareholders to evaluate whether share buybacks create any value compared to distributing the cash as dividends. I have chosen to analyse the possible shareholder value creation via a simple approach namely by using absolute returns and relative returns. This approach has been chosen as the absolute return reflects the actual value created – or destroyed – by the share buyback and as such it can be easily evaluated whether the buyback was a success or not. Furthermore I calculate a return relative to a broad benchmark in order to see what return professional investors who hedge or diversify their investments would have earned on the share buybacks. My analysis show that the more than half of the buybacks in the sample had a negative absolute total return in both 1,2,3 and 4 years of -1,5% -0,8% -7,8% and -21,6%. Similarly more than half of the buybacks had negative relative return in all periods. The relative return was in general lower than the absolute return indicating that the negative absolute return was not due to a general development in the stock market. The conclusion drawn is that share buybacks in general do not create value for shareholders as both the absolute and relative return is negative. My analysis also shows that in general it is not possible to classify a share buyback as either good or bad. The correlation in return from year to year is more or less random which further supports the conclusion that companies do not add value for the shareholders by conducting share buybacks. Finally I test if company size and price-to-book ratio has any influence on the return. Unlike what international studies have shown I find that larger companies have higher returns on their share buybacks than smaller companies. The results on price-to-book ratio is mixed as the absolute return supports the theory that low price-to-book companies should earn higher returns. But the relative return analysis show the opposite result so no clear conclusion can be drawn on this subject.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2011