Market Underreaction to Open Market Share Repurchases
Source: Ikenberry, D., Lakonishok, J. & Vermaelen, T. (1995) · Journal of Financial Economics 39(2–3), 181–208 · DOI 10.1016/0304-405X(95)00826-Z
TL;DR
Firms announcing open-market share repurchases earn positive long-run abnormal returns: the average four-year buy-and-hold abnormal return after the announcement is 12.1%, and it is concentrated in value (high book-to-market) firms at 45.3%, while "glamour" (low book-to-market) firms show no positive drift. The market underreacts to the buyback signal — managers' implicit "our stock is cheap" message is only slowly incorporated. Based on 1,239 announcements over 1980–1990 (NYSE/ASE/NASDAQ).
What anomaly it documents
Predictor: open-market repurchase announcement (event), interacted with book-to-market.
Direction: positive — buyback announcers, especially value firms, earn positive future abnormal returns.
Shape: post-event drift over multiple years; concentrated where management's undervaluation signal is most credible (value stocks). Evidence of underreaction to a corporate signal.
Compute long-run (up to four-year) buy-and-hold abnormal returns versus size/book-to-market-matched reference portfolios.
Split the sample by book-to-market quintile to isolate the value vs. glamour pattern.
Evidence and replication
Group
4-year abnormal BHAR
Source
All repurchasing firms
+12.1%
this paper
Value (high-BM) repurchasers
+45.3%
this paper
Glamour (low-BM) repurchasers
No positive drift
this paper
Why it might work
Underreaction to a credible undervaluation signal from insiders.
The concentration in value firms fits the signaling interpretation: cheap firms buy back when genuinely undervalued, and the market is slow to revalue them.
Limitations and risks
Long-run abnormal-return measurement is sensitive to the benchmark and bad-model problems (Fama, 1998).
Buyback motives have shifted (e.g., offsetting option dilution, payout substitution), possibly weakening the signal over time.
Four-year holding periods imply long capital lock-up and overlapping-event statistical issues.
Key references
Ikenberry, D., Lakonishok, J. & Vermaelen, T. (1995) — Market Underreaction to Open Market Share Repurchases — Journal of Financial Economics
Loughran, T. & Ritter, J. (1995) — The New Issues Puzzle — Journal of Finance
Fama, E. (1998) — Market Efficiency, Long-Term Returns, and Behavioral Finance — Journal of Financial Economics
Provenance: verified/generated from the paper's full text.
