Journal of Financial and Quantitative Analysis

Research Article

Economic Sources of Gain in Stock Repurchases

Konan Chana1, David Ikenberrya2 and Inmoo Leea3

a1 kchan@mba.ntu.edu.tw, Department of Finance, National Taiwan University, 50, Lane 144, Keelung Rd, Sec 4, Taipei 106, Taiwan;

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

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

Abstract

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.

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