Journal of Financial and Quantitative Analysis

Research Article

Economic Sources of Gain in Stock Repurchases

Konan Chana1, David Ikenberrya2 and Inmoo Leea3

a1, Department of Finance, National Taiwan University, 50, Lane 144, Keelung Rd, Sec 4, Taipei 106, Taiwan;

a2, Department of Finance, University of Illinois at Urbana-Champaign, 340 Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61821;

a3, College of Business Administration, Korea University, 1 5-ga, Anam-dong, Sungbuk-gu, Seoul 136–701, Korea.


Previous studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run performance. The initial reaction provides some support for the mispricing story. However, subsequent earnings-related information shocks suggest that the initial market reaction is incomplete and that long-run performance may be informative. The long-horizon return evidence is most consistent with the mispricing hypothesis and, to some degree, the free cash flow hypothesis. We find little support for the leverage hypothesis.