First-month repurchase announcements

• In Event: Accounting Behavior and Organizations II

Abstract

Prior studies consistently find positive abnormal returns following firm repurchase announcements. We examine the association between announcement month and the excess returns. We find that the average excess return is much higher for repurchases announced in the first month of a fiscal quarter than those announced in the other two months. This first-month effect is consistently observed in the four fiscal quarters. Interestingly, first-month announcers and non-first-month announcers are highly comparable in firm characteristics and pre-announcement returns. The magnitude of first-month effect barely changes after we switch to multivariate regressions and remains large under firm-fixed effects. From portfolio construction perspective, traditional strategies based on BTM, firm size, and pre-announcement return are all improved by incorporating a first-month strategy. The first-month effect extends well beyond the first year, but the market does not seem to be aware of it at all. We propose an explanation for the first-month announcers’ outperformance: While managers always claim that they repurchase shares due to undervaluation, their perception is more likely to be true if it is information-based. The first-month repurchase decisions are likely to be made based on the new information managers receive around the previous quarter-end, when actual quarterly performance information becomes available. We also provide some empirical support for this explanation.

Author

• Lingxiang Li, State University of New York-Old Westbury