RFS Advance Access originally published online on March 27, 2008
Review of Financial Studies 2009 22(4):1693-1745; doi:10.1093/rfs/hhn024
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The Nature and Persistence of Buyback Anomalies
INSEAD
Send correspondence to Theo Vermaelen, INSEAD, Boulevard de Constance, 77305 Fontainebleau, France; telephone: +33-16072-4000; e-mail: theo.vermaelen{at}insead.edu.
JEL Classification: G14, G35
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Abstract |
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Using recent data, we reject the hypothesis that the buyback anomalies first reported by Lakonishok and Vermaelen (1990, Journal of Finance 45:455–77) and Ikenberry, Lakonishok, and Vermaelen (1995, Journal of Financial Economics 39:181–208) have disappeared over time. We find evidence consistent with the hypothesis that open market repurchases are a response to a market overreaction to bad news: significant analyst downgrades, combined with overly pessimistic forecasts of long-term earnings. Stock prices after tender offers are set as if all investors tender their shares, but empirically they do not. Thus, the arbitrage opportunity persists because the market sets prices as if the average, not the marginal investor, determines the stock price.
We would like to thank the anonymous referee, Toby Moskowitz (the editor), and Gustavo Grullon for their suggestions, and seminar participants at the 2006 American Finance Association meetings, the 2006 European Financial Management Association meetings, the 2006 Multinational Finance Association meetings, the University of Frankfurt, the National University of Singapore, Singapore Management University, the University of Michigan, the City University of London, and the Summer Symposium on Financial Markets in Gerzensee for their comments.