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Unformatted text preview: A Presentation On Share Price Performance Following Actual Share Repurchases - Hua Zhang AF5331 Corporate Financial Management Instructor Date : Dr. Antonio Wong : 26 October, 2005 Group 5: Kwok Tai On, Cathay Shek Ching Yee, Jessica Tai Yuen Fai, Patricia Tong King Hang, Antony Wong Man Fai, Timothy 03739346G 04712020G 04725929G 04714141G 04419219G Agenda Agenda 1. Introduction, Disclosure Requirements Pat & Share Repurchase Data 2. Short Term Share Price Performance 2.1 Across Size & BTMV Quartiles Cathay 2.2 Grouped by Repurchase Characteristics Antony 2.3 Robustness Check 2.4 Cross Sectional Regression Analyses 3. Long Term Price Performance Jessica 4. Conclusion Tim Introduction Introduction Purpose: Investigate stock price performance after actual share Investigate repurchases repurchases Question: Do insider managers have the ability to detect and seize Do ability opportunities in making actual repurchases when their shares are undervalued? undervalued Introduction Introduction Background: Investment Investment Open Market Share Repurchases Open Repurchases Offset Dilution Offset Cashflows Shareholders Shareholders Share repurchase programs Share Exchange Options : market value vs “true” value market “true” Introduction Introduction Background: (cont’) Value of the exchange option Ability of managers to detect and seize the Ability of opportunities opportunities When share prices are relatively undervalued undervalued Incorrect detection of deviations value drops Introduction Introduction Background: (cont’) Information Asymmetry - better assessment ability? better Insider managers Insider - more company-specific information Outside professional investors Outside - more market-wide information - greater capability to process it Data Data Why data from HK Stock Market? HK HK Disclosure Requirements - SEHK listing rules Disclosure Strict, Complete and Timely Why not US? NO Actual daily share repurchases data r observed at the time of transaction ¨ r directly measured afterwards ¨ directly Data Data Why data from HK Stock Market? (cont’) Unique actual daily share repurchase data Unique Quantify market reaction to actual share repurchases Quantify market directly investigate the “good investment” hypothesis investigate “good ii.e. Do insider managers have the ability to assess if .e. ability their stocks are good investment when they make actual repurchases? actual Disclosure Disclosure Disclosure Requirements: 1. Approval? YES (i) Shareholders’ AGM (ii) the Exchange Authorization valid until the next shareholders’ general Authorization meeting meeting 2. When? Any time….. except Any except sensitive periods, e.g. 1-month before earnings sensitive announcement announcement Disclosure Disclosure Disclosure Requirements: (cont’) 3. How many? (i) < 10% of the outstanding shares (ii) trading volume < 25% than previous month (iii) Need to disclose (iii) 4. Price range? 4. Need to disclose Disclosure Disclosure Disclosure Requirements: (cont’) 5. SEHK Listing Rules Repurchase Repurchase Shares (T) (T) Report to SEHK (T+1) (T+1) before 9:30am Release to Media (T+2) (T+2) before opening of stock trading at 10am Sample Sample Data Sample Stock Market: Hong Kong Period: Sep 1993 to Aug 1997 Eliminations: Firms without BTMV ratios Final Sample: Sample firm: Daily repurchases: Repurchased value (HK$): Repurchased Repurchased shares: Repurchased Repurchased events*: Repurchased 135 135 3,628 3,628 5.7 billion 5.7 1.6 billion 1.6 800 800 Sample Sample Data (cont’) Sample *Repurchase Event: Repurchase First repurchase day First (for multiple repurchases within a month) Total No. of Repurchase Event Medium-size firms > Glamour firms Short Term Short Price Performance Time Frame Windows Price Performance (-20 , -1) 1 month prior to share repurchase (0, 2) Initial reaction (0, 20 ) 1 month after share repurchase Short Term Price Performance Full Sample (cont’) N CAR (p-value) (-20, -1) (0,2) (0, 20) 800 -1.844 (0.000) 0.429 (0.007) 0.688 (0.102) Market Value VS True Value Stocks relatively under-performed than market Repurchase Short-term Positive Market response to actual share repurchase Across Size Quartiles Short Term Price Performance N Size (-20, -1) (0, 2) (0, 20) CAR (p-value) 109 1 (small) 0.593 (0.677) 0.941 (0.078) 4.127 (0.003) CAR (p-value) 242 2 0.564 (0.460) 0.770 (0.009) 1.872 (0.017) CAR (p-value) 109 3 -4.03 (0.000) 0.253 (0.350) -0.282 (0.694) CAR (p-value) 268 4 (large) -3.296 (0.000) -0.074 (0.778) -1.531 (0.028) Repurchase even though NO abnormal declines HIGH Abnormal Returns, Future +ve Information Across Size Quartiles (cont’) Short Term Price Performance N Size (-20, -1) (0, 2) (0, 20) CAR (p-value) 109 1 (small) 0.593 (0.677) 0.941 (0.078) 4.127 (0.003) CAR (p-value) 242 2 0.564 (0.460) 0.770 (0.009) 1.872 (0.017) CAR (p-value) 109 3 -4.03 (0.000) 0.253 (0.350) -0.282 (0.694) CAR (p-value) 268 4 (large) -3.296 (0.000) -0.074 (0.778) -1.531 (0.028) Repurchases due to share price declines Short Term Price Performance Across Size Quartiles (cont’) Summary: Smaller firms Future +ve performance Larger firms Initial share price declines Across BTMV Quartiles Short Term Price Performance N BTMV (-20, -1) (0, 2) (0, 20) CAR (p-value) 216 1 (high) -0.071 (0.928) 1.413 (0.000) 1.899 (0.019) CAR (p-value) 245 2 -0.888 (0.198) 0.656 (0.014) 1.007 (0.154) CAR (p-value) 224 3 -2.477 (0.001) -0.283 (0.306) 0.949 (0.194) CAR (p-value) 115 4 (low) -5.980 (0.000) -0.516 (0.242) -2.775 (0.017) Market reacted more favorably to Value stocks > Glamour stocks Consistent with pattern across Size Quartile By no. of days since last repurchase (Ndays) N Ndays (-20,-1) (0,2) (0,20) CAR (p-value) CAR (p-value) 401 <= 32 -1.098 0.131 0.087 (0.068) (0.574) (0.888) 399 >32 -2.594 0.728 1.292 (0.000) (0.001) (0.030) By actual no. of repurchases (NP3M) N NP3M (-20,-1) (0,2) CAR (p-value) CAR (p-value) 407 <= 3 393 >3 N CAR (p-value) CAR (p-value) Degree of “Surprise” Ndays (0,20) -3.007 0.599 0.933 (0.000) (0.007) (0.112) -0.641 0.253 0.434 (0.270) (0.260) (0.465) By repurchase size (%) % (-20,-1) (0,2) -1.963 0.413 (0.000) (0.041) 400 Low -1.726 0.444 (0.004) (0.058) 400 High Short Term Price Performance (0,20) 0.705 (0.187) 0.672 (0.279) NP3M Repurchase Size (% of outstanding shares) Robustness check Robustness Firms have different repurchase behaviour : different More Frequent VS Less Frequent Results To examine this possibility : To Average CARs by Firm Conduct t-test across sample firms Average t-test across Robustness Check Table 4 Windows n (-20,1) (0,2) (0,20) CAR -2.493 0.685 0.879 p-value (0.001) (0.016) (0.242) Full sample 135 Results are Consistent Table 3 Full sample 800 CAR -1.844 0.429 0.688 P-value (0.000) (0.007) (0.102) Cross-sectional regression analyses regression Nature of Market Reactions Nature arket CAR (0,2) and CAR (0,20) are regressed on : CAR Firm size BTMV Repurchase Characteristics epurchase CAR(-20,-1) is included to : CAR(-20,-1) control the possible mean reversion that might arise control from the average negative returns from Table 5 Dependent Variables Independent Variables CAR(0,2) CAR(0,20) 0.00497 (0.587) 0.0674 (0.003) 0.009 (0.545) 0.127 (0.001) Lsize -0.00203 (0.102) -0.01050 (0.001) BTMV 0.00676 (0.001) 0.0136 (0.007) Repurchase Size 0.00510 (0.042) -4.27*10-4 (0.944) Ndays 3.20*10-5 (0.018) 6.87*10-6 (0.834) NP3M 8.15*10-5 (0.698) 8.07*10-4 (0.116) Intercept CAR (-20,-1) Results Table 5 Lsize CAR (0,20) Repurchase size Ndays NP3M - + + + + Insignificant CAR (0,2) BTMV Significant Significant Significant Insignificant - + - + + Significant Significant Significant Insignificant Insignificant Results Results Tables 3 - 5 Market reacts more favorably to Market Small firms Small Value firms Value On average Short-Term market responses On market Economically Insignificant Economically Small and Value firms, the abnormal returns Small and Economically & Statistically Significant Economically Long Term Long Price Performance Barber and Lyon (1997) Measurement benchmark: Control Firm approach Detect long-run abnormal stock returns Buy-and-hold abnormal returns (BHARs) = Buy-and-hold returns (BHRs) of Repurchase firms - Buy-and-hold returns (BHRs) of Control firms Long Term Long Price Performance Table 6 Buy-and-hold returns (BHRs) following actual share repurchase events up to three years n Full sample Repurchase firms Control firms BHARs p-value September 93 to August 95 Repurchase firms Control firms BHARs p-value September 95 to August 97 Repurchase firms Control firms BHARs p-value Year 1 Year 2 Year 3 800 5.68 4.55 1.13 (0.644) 14.81 15.21 -0.39 (0.918) 0.67 1.77 -1.10 (0.788) 464 -0.71 0.27 -0.97 (0.683) 30.76 35.16 -4.39 (0.415) 22.82 19.47 3.35 (0.566) 336 14.50 10.46 4.03 (0.400) -7.21 -12.34 5.13 (0.319) -29.92 -22.67 -7.25 (0.180) Table 6 - Results Table Results Long Term Price Performance Average 1, 2 and 3-year BHARs in full sample NOT significant 2 equal sub-sample periods: Sep-93 to Aug-95 , Sep-95 to Aug-97 NOT significant Insider managers DO NOT exhibit superior performance Long Term Price Performance Table 7 Buy-and-hold abnormal returns (BHARs) by book-to-market value (BTMV) quartile ranking following actual share repurchase events up to three years n BTMV Year 1 Year 2 Year 3 Repurchase firms Reference portfolio BHARs p-value 216 1 (high) 10.56 9.05 1.51 (0.770) 38.43 32.39 6.04 (0.533) 12.04 -8.61 20.66 (0.001) Repurchase firms Reference portfolio BHARs p-value 245 2 7.69 1.41 6.28 (0.087) 10.38 8.85 1.53 (0.757) 14.40 19.65 -5.25 (0.567) Repurchase firms Reference portfolio BHARs p-value 224 3 2.23 2.11 0.12 (0.979) 12.32 13.16 -0.85 (0.898) -7.84 -0.40 -7.44 (0.297) Repurchase firms Reference portfolio BHARs p-value 115 4 (low) -1.06 7.54 -8.60 (0.245) -15.23 0.45 -15.67 (0.100) -33.39 -12.62 -20.77 (0.032) Long Term Price Performance Table 7 - Results Table Results “Value” firms (highest BTMV) BHARs for 1, 2 and 3-year Positive and Increase with the holding horizon 3-year BHAR statistically significant Other three BTMV quartile firms 3-year BHAR NOT statistically significant Moving from “Value” firms to “Glamour” firms Long-run BHARs decline in general. Long Term Price Performance T able 8 Three-year buy-and-hold abnormal returns (BHARs) is regressed on the characteristics of the firm and actual repurchase events Independent variables Dependent variable 3-Year BHARs Intercept - 0.457 (0.051) Regression Results CAR(-20, -1) 0.327 (0.389) Lsize 0.0153 (0.626) BTMV Coefficient BTMV 0.273 (0.000) - highly significant Repurchase Size - 0.0382 (0.550) Ndays 2.879 (0.402) NP3M - 0.00507 (0.344) Adj. R 2 F -value 0.032 5.39 (0.001) Conclusion Conclusion Findings: Abnormal returns vary across size and book-to-market value Abnormal quartiles: quartiles: Small and High BTMV firms Abnormal returns - Economically and Statistically Significant Abnormal behave opportunistically when they implement actual share repurchases. repurchases. High value firms High Over a long horizon, managers can deliver superior Over performance performance Conclusion Conclusion The market responds the most favorably to The repurchases that are made by small and value firms. small 3-year buy-and-hold abnormal return (BHAR) is over 20% 20% Conclusion Conclusion Do insider managers have the ability to detect and seize Do opportunities in making actual repurchases when their shares are undervalued? shares Not sure, but ….. At least for high book-to-market value firms, for which At high for undervaluation is more likely to occur undervaluation ...
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