Author: Yeung, Siu-fan
Title: A study of share repurchases by listed companies in Hong Kong
Degree: M.Phil.
Year: 2000
Subject: Hong Kong Polytechnic University -- Dissertations
Stock repurchasing -- China -- Hong Kong
Stock exchanges -- China -- Hong Kong
Department: Department of Accountancy
Pages: ix, 130 leaves ; 30 cm
Language: English
Abstract: This study investigates share repurchasing activity in Hong Kong. Using share repurchasing companies as a test sample and non-repurchasing companies as a control sample, I test the financial and market characteristics of share repurchasing companies and their decision to buy back shares. Focusing on the share repurchasing companies, I model the number of shares repurchased as a function of firm-specific characteristics. Models are also developed to examine the short- and long-term share market price reactions. Finally, I test if share repurchases convey companies' future earnings information. Consistent with previous studies, I find that the share repurchasing companies are more undervalued by the market than non-repurchasing companies prior to share repurchases. The results provide additional support to the notion that the managers are primarily motivated by undervaluation to buy back shares. Cash appears to be a dominant factor in determining the number of shares repurchased. In examining the short-term share market price reaction, both proxies for undervaluation, previous cumulative abnormal share returns and book-to-market ratio prior to share repurchases, are significantly related to the cumulative abnormal share returns surrounding the first share repurchase date in negative and positive directions, as expected. Although the findings concerning the long-term share market price reaction are somewhat mixed across models, in general, previous cumulative abnormal share returns and book-to-market ratio prior to share repurchases are, again, negatively and positively related to the long-term buy-and-hold abnormal share returns. Finally, against my prediction, no sharp increase in companies' earnings is detected following share repurchases. Instead, share repurchasing companies presistently exhibit poor performance in earnings in the year of share repurchases relative to the prior year's performance. Furthermore, no positive earnings per share forecasts' revisions are made by analysts following share repurchases. In sum, the signs and significances of previous cumulative abnormal share returns and book-to-market ratio prior to share repurchases, as proxies for undervaluation, produce predicted and satisfactory results, supporting the notion of the information signalling hypothesis. That is, the managers use share repurchases as a communication channel to signal investors that their companies are being undervalued by the market. On the other hand, conflicting results for the cash variable provide only limited support to the free cash flow hypothesis, which postulates the companies employ share repurchases to distribute excess cash to their shareholders. In addition, it appears that no favourable future earnings information is contained in share repurchases, suggesting the signal conveyed by the share repurchasing companies is not earnings.
Rights: All rights reserved
Access: open access

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