An announcement effects of share repurchase based on the prior consecutive events

..

逢 甲 大 學

經營管理碩士在職專班
碩士論文
連續事件基礎之庫藏股買回宣告效果

The Announcement Effects of Share Repurchase
based on the Prior Consecutive Events

指導教授:

王若愚
邱安安

研 究 生 : Ngo Mai Phuong (吳梅鳳)

中 華 民 國 一 百 零 七 年 二 月



The Announcement Effects of Share Repurchase based on the Prior Consecutive Events

Acknowledgement
I would also like in a special way to acknowledge crucial role played by my
supervisors, Dr. Wang and Dr. Chiu, for their invaluable support and guidance at FengChia
University. Further, my gratitude and appreciations go to all those individuals and
organizations whose contributions facilitated the completion of this thesis work. I am
sincerely grateful for those who shared their truthful and illuminating views on a number of
issues related to this thesis. Their invaluable and constructive criticism added value to this

document. Finally, I would like to appreciate the guidance given by the panelist especially my
presentation at all stages that has since improved my presentation skills and then quality of
my document.

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摘要
本研究測試台灣 2008 年至 2016 年股票市場上各種事件後的庫藏股買回宣告效果。研
究上將庫藏股宣告前之特定事件區分為現金增資及發行公司債券兩種，並比較這兩種事件後
宣告買回庫藏股之效果。本研究之資料來源為台灣經濟新報資料庫，共蒐集 2858 件庫藏股買
回事件，其中有 105 次庫藏股宣告之前一年亦宣告進行現金增資，而有 299 家次庫藏股宣告
前一年發行公司債。
本研究主要發現庫藏股宣告前企業之異常報酬為負值，而宣告後之異常報酬為正，顯
示庫藏股宣告對股價有正面的助益，尤其在宣告後的第一天更為明顯。而前一年先進行現金
增資，再宣告買回庫藏股的效果雖然有向上的趨勢，但是累積宣告效果始終為負值，亦即對
股價不會有正面的助益。而企業在前一年有發行公司債券者，則在第二年進行宣布買回庫藏
股之效果為正，顯示這樣的財務操作模式對於股價有正面的幫助。
關鍵字: 庫藏股，買回庫藏股 ，連續事

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Abstract

In my research, I examine the share repurchase announcement effect on various
consecutive events in Taiwan from August 2008 to 2016. This study separates the dataset into
different groups based on some events, and the announcement effect difference between the
consecutive. I choose the consecutive events of the seasoned equity offering, Bonds and stock
distribution to comparing announcement share repurchases. The paper consists of 2858 share
repurchase announcements by 2588 firms listed on TEJ, 105 events that announce SEO and
then repurchase announcement next year and 299 events that issue bond and then repurchase
announcement next year, 555 events that stock distribution and then repurchase announcement
next year. Event study methodology and significance test have been used to analyze.
This study found that Taiwan market is under-reacting to the announcements of share
repurchases. After announcement day +1 abnormal return was reached on top. The paper
found that Taiwan market is weak-reacting efficient to SEO announcement while significant
reaction efficient to open-market repurchase announcement. And issuing bonds was the lowest
signal than repurchases announcement effect to Taiwan market, but issuing bond will effect
to share price of announcement repurchase next year. The last, the repurchase announcement
has a significant effect on stock return after the stock distribution announcement.

Keywords: repurchase stock, buyback stock, consecutive events

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Table of Contents
Acknowledgement .................................................................................................................... i
Abstract ................................................................................................................................... iii
Chapter 1 Introduction ............................................................................................................. 1
1.1 Background .................................................................................................................... 1

1.1.1 Share repurchase ...................................................................................................... 1
1.1.2. Share repurchase announcement in Taiwan ........................................................... 2
1.2 Research Problem ........................................................................................................... 3
1.3 Research Object.............................................................................................................. 6
1.4 The structure of the paper............................................................................................... 6
Chapter 2 Literature Review .................................................................................................... 7
2.1 Share Repurchases Motivations ..................................................................................... 7
2.2 Effect of share repurchases ............................................................................................. 9
Chapter 3 Data and Methodology .......................................................................................... 12
3.1 Data .............................................................................................................................. 12
3.2 Event study ................................................................................................................... 13
3.3 Methodology ................................................................................................................ 14
4.1 Whole market impact of announcement repurchases ................................................... 16
4.2 The consecutive effects of the event ............................................................................ 24
4.2.1 The effect the repurchases with a prior SEO announcement ................................. 24
4.2.2 The effects of repurchase announcement with a prior Bond issuing ..................... 34
4.2.3 The effects of repurchase announcement with a prior Stock dividend distribution .... 43
Chapter 5 Conclusions ........................................................................................................... 51
References .............................................................................................................................. 52

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List of Figures
Figure 1 AR and CAR of repurchase announcement of The Market Index Adjustment model
.................................................................................................................................... 19
Figure 2 ARs and CARs of repurchase announcement of The GARCH Risk Adjustment

Model .......................................................................................................................... 19
Figure 3 Events window CARs of Market Index Adjustment model .................................. 22
Figure 4 Event window CARs of the GARCH Risk Adjustment Model ............................ 22
Figure 5 Development of the ARs around the SEO announcement .................................... 27
Figure 6 Development of the CARs around the SEO announcement .................................. 27
Figure 7 ARs and CARs of the repurchase announcement with a prior SEO event ............ 31
Figure 8 ARs and CARs of the repurchase announcement with a prior SEO event ............ 32
Figure 9 CARs around Corporate Bond issuing .................................................................. 35
Figure 10 CARs around Convertible Bond issuing ............................................................. 35
Figure 11 ARs and CARs of the repurchase announcement with a prior Corporate Bond of
the Market Index Adjustment Model ......................................................................... 37
Figure 12 ARs and CARs of the announcement repurchase with a prior Convertible Bond
with Market Index Adjustment Model ....................................................................... 38
Figure 13 ARs and CARs of repurchase announcement with a prior Corporate bond issuing
of GARCH Risk Adjustment Model .......................................................................... 40
Figure 14 ARs and CARs of repurchase announcement with a prior Convertible Bond with
GARCH Risk Adjustment .......................................................................................... 40
Figure 15 ARs and CARs of stock dividend distribution of Market Index Adjustment Model
.................................................................................................................................... 44
Figure 16 ARs and CARs of stock dividend distribution of the GARCH Risk Adjustment
Model .......................................................................................................................... 46
Figure 17 ARs and CARs of repurchase announcement with a prior Stock dividend
distribution.................................................................................................................. 48
Figure 18 ARs and CARs of repurchase announcement with a prior stock dividend
distribution of the GARCH Risk Adjustment Model ................................................. 49

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List of Tables
Table 1 Summary Statistic ..................................................................................................... 12
Table 2 ARs and CARs around announcement repurchase analysis by the Market Index
Adjustment Model ........................................................................................................ 18
Table 3 ARs and CARs around announcement repurchase analysis by the GARCH Risk
Adjustment Model ........................................................................................................ 20
Table 4 ARs and CARs around repurchase transactions ....................................................... 23
Table 5 Development of the AR and CAR around the SEO announcement of Market Index
Adjustment ................................................................................................................... 26
Table 6 Development of the ARs and CARs around the SEO announcement of GARCH
Risk Adjustment Model................................................................................................ 28
Table 7 ARs and CARs of the repurchase announcement with a prior SEO event of the
Market Index Adjustment Model ................................................................................. 30
Table 8 ARs and CARs of the repurchase announcement with a prior SEO event of the
GARCH Risk Adjustment Model ................................................................................. 33
Table 9 ARs and CARs around Bond issuing ........................................................................ 36
Table 10 ARs and CARs of Repurchase Announcement with a prior Corporate Bond issuing .... 41
Table 11 ARs and CARs of the Repurchase Announcement with a prior Convertible Bonds
issuing ........................................................................................................................... 42
Table 12 ARs and CARs around Stock dividend distribution of The Market Index
Adjustment Model on the period 2000-2016................................................................ 45
Table 13 ARs and CARs around stock dividend distribution of the GARCH Risk
Adjustment Model on the period 2000-2016................................................................ 47
Table 14 ARs and CARs around repurchase announcement with a prior stock dividend
distribution on the period 2000 - 2016 ......................................................................... 50

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Chapter 1 Introduction
1.1 Background
1.1.1 Share repurchase
Share repurchase programs have been increasingly popular over the last year and
frequently observed. One of the explanations for the increasing popularity of share
repurchase behavior is the change in governance over the last years. In Euro, Andriosopoulos
and Lasfer (2015) indicated that announcement repurchase increases to 47.2 billion Euro in
1997 compared with 14.2 billion Euro in 1996. Previous researchers show that there are 1159
events of announcement repurchase from 1989 to 1997 in Canada (Ikenberry et al. 2000).
264 events of buyback from 1985 to 1998 in British (Rau and Vermaelen 2002). Hatakeda
and Isagawa (2004) sought that 452 events from 1995 to 1998 in Japan and 800 events from
1993 to 1997 in Hong Kong (Zhang 2005). The share repurchase will be completed mainly
through open market transactions. Brav et al. (2005) found that share repurchases are now a
more important form of payout compared to the past. Besides, Barclay and Smith (1988)
assumed that repurchase stock is an important financial strategy of the firm in developed
countries.
Now that the economy is continuing its recovery, share buyback programs are
quickly becoming all the rage once again with companies and investors. When a company
has excess cash at the end of the day, there are only a few things that it can do with it. They
can save it for a rainy day, invest in new property and equipment for the business, acquire
another company, retire debt, issue a one-t special stock to shareholders, or buy back share
of their stock on the open market. A “stock buyback program”, which can also be known as
a “share repurchase program”, is when a company buys its share back from current
shareholders through the open stock market. Buyback programs can be seen as a signal that
a company believes its shares are undervalued and is often viewed as an efficient way to put
money back into its shareholders’ pockets. According to Stephens and Weisbach (1998),

there are three methods in which a firm can repurchase its own shares: tender-offer
repurchases, Dutch auction repurchases and open-market repurchases. Following McNally
(1999) that an open market repurchase increases a firm’s stock price by increasing its return
on equity and its earnings per share. So, the open-market share repurchase is the most wellknown method. The stock market reacted positively to the announcement of repurchase.
Many studies have investigated that when the firms announced repurchases, firms realize
positive abnormal returns regardless of the time horizon. Zhang (2005) found that the three1
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year buy and hold abnormal return, which is measured against a portfolio of control firms
that are matched by size and book-to-market value ratios, is over 20%. Chan et al. (2004)
argued that after share repurchase announcements, announcing firms experience an average
buy-and-hold yearly return of 26.2% following the announcement date. In addition, a
significant increase in the price of the repurchases stock in the next year, implying that the
market reacts slowly with the information of buyback in short-term. Further, the long-term
performance of the stock repurchase is positive.
About the reasons that why the firms buy back their stock. A stock repurchase plan
can be a good way for a business to reinvest in itself, by using any excess cash at its disposal
to buy back shares of its own stock. Dittmar (2000) gives several reasons a firm may
repurchase stock. The first, Excess capital hypothesis. Repurchase stock, like paying stocks
because in open market repurchases, the firms do not have a commitment to repurchase
(Dittmar 2000) and repurchase is a more flexible means of distributing capital since a penalty
is incurred if distributions are subsequently reduced (Denis et al. 1994). The second,
Undervaluation hypothesis: Repurchase and Policy. The repurchases stock is flexible in
timing which is beneficial because firms can wait to repurchase until the stock price. If the
stock is undervalued, the firm may repurchase stock as a signal to the market or to invest in
its own stock and acquire mispriced shares. According to this hypothesis, the market
interprets the action as an indication that the stock is undervalued (Dittmar 2000). The third,

when the firms announced buy back their stock, there are no taxes paid by shareholders.
Open-markets repurchase stock, shareholders have the freedom to make their own decision
when to pay taxes on their gain (Voss 2012). So, having several possible motives behind the
companies announce buy back stock. Voss (2012) gave 3 motives: undervaluation,
managerial incentives, and the relation between stock repurchase and stocks. Dittmar (2000)
found that firms repurchase stock to take advantage of potential undervaluation and in many
periods, to distribute excess capital.
1.1.2. Share repurchase announcement in Taiwan
Share repurchases have a long history in the United States, and the research on that
has been conducted in the early 1908s. Since then, many research papers focused on US
stock market. There are also many papers focusing on other countries and districts like
Canada and Europe. These papers dig into the motives of share repurchase and show a large
number of empirical results to prove the positive relationship between share repurchases and
stock return or results to the positive of announcement repurchase stock. In Taiwan,
according to corporation law, share repurchase was regulated by articles 158, 163, and 167
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of the Company Act. However, changes started in 2000 due to the aftermath effect of the
Asian financial crisis in 1997 and the burst of the Internet Bubbles in 2000. To reboot the
securities market, in July 2000 Taiwan Legislative Yuan passed Article 28-2 of the Securities
and Exchange Act and allowed corporations to repurchase their outstanding share for
strategic purposes. In the first year following the enactment of these regulations, about onequarter of firms listed on either TWSE or the Over-the-Counter market (OTC) announced
share repurchase programs within 5 months of that year. Now firms could perform share
repurchases for employee shares transferring, equity conversion for coordinating or
maintaining the company’s credit, and shareholders’ equity.
Listed companies have been permitted to repurchase their shares since August 200

in Taiwan. According to the regulations, listed companies are allowed to make repurchase
announcement for any of the following purposes: (1) providing shares as incentives, (2)
converting bonds to shares, and (3) protecting company creditability and equity. The
regulations provide listed companies an option to execute them repurchase announcements
without any buy-back obligations.
A company repurchasing its own share at a centralized securities exchange market
or at the place of business a securities firm shall, within two days on which the resolution
was made at a meeting of the board of directors, announce the repurchase. The items should
be reported to the Securities and Futures Commission (SFC) including: (1) purpose of the
repurchase, (2) type of shares to be repurchased, (3) ceiling on total monetary amount of the
repurchase, (4) planned period for the repurchase and number of shares to be repurchased,
(5) price range of the share to be repurchased, (6) method for the repurchase and (7) number
of shares held at the time of reporting and so on.
Within two months of the day of expiration of the reporting period for the planned
repurchase, the company may, through a majority vote at a meeting of the board of directors
attended by at least a two-thirds quorum, amend the originally reported purpose of the
repurchase by filing a report with the Securities and Futures Commission.
1.2 Research Problem
There are several ways in which companies can manage the capital such as stock
distributions, stock buybacks, corporate bonds and seasoned equity offering (SEO). All of
them is the method of distributing cash to shareholders, but the effects on financial ratios
and shareholders’ investment return are different. Obviously, some critical information
behind these methods of capital adjustment may be conveyed to the market.

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The firm's issue shares to raise equity capital but if there are no potential growth
opportunities in sight, holding on to all the unused equity funding means sharing ownership
for no good reason. Buyback some outstanding share can be a simple way to pay off investors
and to reduce the cost of capital. Stocks can be undervalued for a number of reasons. If the
stock price is dramatically undervalued, the issuing company can repurchase some of its
shares at this reduced price. After the market price is corrected, the company then reissue
the repurchase stocks to increase the equity capital without issuing any additional shares.
The rapid influx of investors artificially inflates the stock’s valuation and boosts the firm’s
price to earnings ratio. Share repurchase is an alternative to paying stocks in that it is another
method of returning cash to investors. A stock repurchase occurs when a company asks
stockholders to tender their shares for repurchase by the company. A company purchases its
own share in the open market anytime to decrease the number of shares held by the public,
thereby increasing the ownership stake of each remaining shareholders and hopefully the
share price. Because every share of stock is a partial share of a company, the fraction of the
company that each remaining shareholder owns increases. In the short-term, the stock price
may rise because shareholders know that a buyback will immediately boost earnings per
share. Over the long-term, a buyback may or may not be beneficial to shareholders.
According to Hackethal and Zdantchouk (2006) the number of German buybacks depends
on market state; in Baisse (bear market) it is significantly larger than in Hausse (bull market).
Moreover, the effect of buybacks on prices in the first phase is significantly strong than in
the second. So the first objective of this research is to test the share repurchase announcement
effect of the whole market.
The stock is a distribution of a portion of a company’s earnings, decided by the board
of directors, paid to a class of its shareholders. Stocks can be issued as cash payments, as
shares of stock, or other property. When a company issues a stock to its shareholder, the
value of the stock is deducted from its retained earnings. Even if the stock is issued as
additional shares of stock, the value of the stock is deducted. Miller and Modigliani (1961)
stated the irrelevance theory, thus that stocks do not affect the firm value under perfect
capital market, under certain strong prerequisites as a certain market process, an efficient
market and the absence of taxes bankruptcy, agency costs and asymmetric information.

Stock dividend distribution is, therefore, considered to be one of the most important financial
decisions that corporate managers encounter (Bhattacharya 1979). Hence a firm ought to pay
stocks to the shareholder if it cannot identify suitable investments which would bring higher
returns than those expected by the shareholders (Adefila et al. 2004). Jagannathan et al.
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(2000) indicated that stock repurchases and stock are used at different times from one
another, by different kinds of firms. Stock repurchases are very pro-cyclical, while stocks
increase steadily over time. Firms repurchase stock following poor stock market
performance and increase stocks following the good performance. Following Dittmar (2000)
if stocks and repurchases are a substitute, this regulatory change should cause the volume of
repurchases to decrease subsequent to the implementation of the change. If repurchase and
stocks are substitutes, then stock repurchases should be negatively related to a firm’s stock
payout ratio. With the many researches about the effect of repurchases stock and stock
dividend distribution, in this paper, I want to test the firm announced share repurchases
with/without stock dividend distribution in the previous year.
SEO may signal to the market that the firm is overvalued, while share repurchase
may signal the market that the firm is undervalued. Indeed, SEO tends to cluster in times of
high stock market valuations (Masulis and Korwar 1986, McLaughlin et al. 1998
,Hovakimian et al. 2001), whereas share repurchase is more common in times of low market
valuations (Ikenberry et al. 1995). If managers are indeed timing the market in their
corporate finance decisions by issuing stocks, they would do SEO and repurchase when the
stock is overvalued and undervalued respectively. They should decrease their holding of
company stock in years when there is an SEO, while they should increase their holdings in
years when there is a share repurchase. The distributions of net purchase and change in
holding shift to the left when there is an SEO does not change when there is a cash acquisition

and shift to the right when there is a share repurchase. In this paper, I test the difference
between when the firm announcement repurchases and when the firms give the SEO.
In practice, some companies would like to raise funds by using bonds, which helps
them obtain the funds supporting the capital budgeting and avoiding the earnings dilution.
The announcement of the new bond issue has been seen have a negative effect on stock
prices. Potential explanations of this negative effect- the price-pressure, wealthredistribution, and information-release hypothesis- imply different share-price reactions to
the announcement of bonds (Kalay and Shimrat 1987). Hotchkiss and Ronen (2002) gave
that if the bond market is less efficient, stocks will reflect information about the value of
underlying assets more quickly, stock returns have predictive power for future bond returns.
In terms of informational efficiency, the behavior of these bonds is similar to that of the
underlying stock. This paper investigated the difference between the share-repurchase firms
with corporate bond issues in the previous year.

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1.3 Research Object
This paper investigates the share-repurchase announcement effects on various
consecutive events. Most of the previous research focused on the announcement effects,
however, none of them pay attention to the firms’ consecutive behaviors such as seasonal
offering and corporate bonding issuing and then adopting the share-repurchase. This
research aims to test the share repurchase consecutive announcement effects.
1.4 The structure of the paper
This research is divided into five sections including this one on Introduction. Next
section covers the past literature on the subject. The third section lays down the research
methodology employed in the study. The empirical findings are reported in the fourth section
and finally, the last section concludes the paper with an outline of implications of the study.

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Chapter 2 Literature Review
A share repurchase refers to the process when a company re-acquires its own stock
or, in other words, the company buys shares back from its shareholders. Share repurchase is
a tool for managers to buy back a company’s own shares on the stock market. The company
uses cash to buy back its own shares, decreasing the among of shares outstanding. The in
1967 a Senate Committee wrote: “Corporate repurchases of their own securities may serve
a number of legitimate purposes. For example, they may result from a desire to reduce
outstanding capital stock following the cash sale of operating divisions or subsidiaries, or
to have shares available for options, acquisitions, employee or stock purchase plans, and
the like, without increasing the total number of shares outstanding. Repurchase programs,
however, may also be utilized by management to preserve or strengthen their control by
counteracting tender offers or other attempted takeovers or may be made in order to
increase the market price of the company’s shares. Whatever the motive behind the
repurchase program, if the repurchases are substantial they will have a significant impact
on the market.” (Senate Report No.550, 90th Congress, 1967).
I divided this chapter into two sections. In the first section, the motivations of share
repurchase will be reviewed. The second section which discusses the efficient market theory,
which describes the effect of share repurchase announcements on the share price movements.
2.1 Share Repurchases Motivations
This part describes the motives which explain why firms enter into a share repurchase
program. Share repurchases are similar to stocks because both are used to distribute cash
back to stockholders and both are considered as a positive signaling. In past literatures, there
are several reasons for buybacks motives such as the signaling hypothesis or undervaluation

hypothesis (Ikenberry et al. 1995; Baker et al. 2003), the free cash flow hypothesis (Stephens
and Weisbach 1998); the preferential tax hypothesis, increase earnings per share and
repurchases and stock options (Voss 2012). Dittmar (2000) investigated the relation between
stock repurchase and distribution, investment, capital structure, corporate control, and
compensation policies over the 1977-96 period. He gave five reasons a firm may repurchase
stock. The first, excess capital hypothesis: Repurchases and Distribution. The second,
Undervaluation Hypothesis: Repurchases and Investment policy. The third, Optimal
leverage ratio Hypothesis: Repurchases and Capital structure policy. The fourth,
Management Incentive Hypothesis: Repurchases and Compensation policy. The last,
Takeover Deterrence Hypothesis: Repurchases and Corporate. He tests the five hypothesis
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discussed above with the following Tobit model estimated for each sample year using crosssectional data. The sample consists of all firms listed on Compustat and by the Center for
Research in Security Prices. Dittmar stated that firms repurchase stock when they are
potentially undervalued. Firms also repurchase stock to distribute excess capital, increase
their net leverage, fend off takeover attempts, and counter the dilution effects of stock
options. Firms repurchase stock to fend off takeover attempts in many of the year that
coincide with peak merger periods. The repurchasing to take advantage of undervaluation is
the most consistently significant motive for repurchasing stock over the sample period
however, it is only one of the significant motives for repurchasing. A firm may repurchase
for only one of these reasons, or it may repurchase only when multiple criteria are met. So
following the previous research, the main motives are constructed as follows: signaling
hypothesis, free cash flow hypothesis, capital structure hypothesis, stock substitution
hypothesis and tax efficiency hypothesis.
The signaling hypothesis is based on the belief that information asymmetries exist
between management and outsiders. The management team knows more than the

shareholder does. If managers believe the market price of their stocks does not provide a fair
value for the discounted future cash flows, management can repurchase shares. Therefore,
managers can use share repurchase as a signal to the less informed outside investors if they
disagree on the current share price or express their expectations on future earnings and firm
performance. Besides, The signaling hypothesis based on undervaluation (Vermaelen 1981).
Undervaluation implies that based on the premise of information asymmetry between
insiders and outsider, a firm may be misvalued (Dittmar 2000). Managers believe that the
stock is undervalued, the firm may take action to repurchases shares as a signal to the outside
market or to invest in its own misprices shares. Then the market interprets the firm’s action
as a signal that the stock is undervalued. Furthermore, the positive share price reaction to the
announcement date should correct the misprices stock (Dann 1981; Vermaelen 1981).
However, firms do not have to actually take share repurchase action event if they make
an announcement (Rau and Vermaelen 2002). Chan et al. (2004) showed that firms look at
changes in earnings and decide whether to repurchase after that. They also find the negative
relation between abnormal returns on announcement dates and abnormal returns after the
announcement.
Free cash flow hypothesis is a possible explanation for share repurchase. According to
Wu (2012) the repurchases stock uses management ownership to measure the severity of
firms’ agency problem. The findings suggest that firms with a less severe agency problem
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have more information in the repurchase announcements, buy back fewer shares, and perform
better after the repurchase programs. The firms will distribute excess cash flow to shareholders
so as to reduce manager power. Stephens and Weisbach (1998) found a positive relation
between excess cash flow and repurchase transactions, the more excess cash flow, and the
larger quantities of share repurchase. However, Grullon and Ikenberry (2000) gave that free

cash flow hypothesis is inconsistent, and they found that firms which do not execute share
repurchase after announcement earn a higher excess return than those who actually repurchase
shares.
The firms may use share repurchase to fine –tune their capital structure and respond to
the potential dilutive effects from employee stock option plans. Grullon and Ikenberry (2000)
state that share repurchase is a popular way for firms to change the capital structure. Dittmar
(2000) found that when the firms distribute the capital, they reduce their equity and increases
their leverage ratio. However, Dann (1981) proposes that it is not the best option for a firm to
initiate a share repurchase program if it tends to achieve the optimal leverage ratio since the
issuance of new debt would be a better alternative.
Stock substitution hypothesis and tax efficiency hypothesis are complementary to each
other. Stock substitution hypothesis implies that share repurchase is a substitute for the stock
payout since it is more flexible. Voss (2012) reported that the relative advantages of share
repurchase over stocks because of the tax preference hypothesis, the type of shareholder
hypothesis, and the financial flexibility hypothesis however limited, merit in explaining
repurchases. Zhang (2005) found the negative relation between stock cut and firm value, while
share repurchases programs do not bear such kind of risk.
Tax efficiency hypothesis implies that companies may prefer share repurchase if the
tax burden is higher on stocks than on capital gains, since stocks are subject to the ordinary
income tax, while in terms of share repurchase, investors only need to pay tax on the difference
between the purchase price and the selling price, which is the capital gain tax (Grullon and
Michaely 2002). In addition, share repurchase has the advantage of postponing the realization
of capital gains and therefore postpone the tax payment. Bagwell and Shoven (1989) have
indicated that firms substitute share repurchase for stock payout in order to get the tax benefit
for shareholders.
2.2 Effect of share repurchases
McNally and Smith (2007) found that companies utilize limit orders when
repurchasing shares, suggesting that firms repurchase shares in an attempt to provide liquidity
and buffer sell-side pressure in order to provide price support for falling stock prices. McNally
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and Smith (2007) found that, on average, share repurchases for TSX listed firms account for
12.25 percent of total trading volume during the repurchase program period.
Repurchase stock reduces the number of shares in a company held by the public.
Because every share of stock is a partial share of a company, the fraction of that company that
each remaining shareholder owns increase. In the near term, the stock price may rise because
shareholders know that a buyback will immediately boost earnings per share. Over the long
term, a buyback may or may not be beneficial to shareholders. Wang et al. (2013) investigated
the short-term and the long-term price performance of repurchasing firm. He found the shortterm 4-day cumulate abnormal returns CAR (-1,2) is 1.9142 percent while the mean of CAR
(-1,5) is 2.7086 percent. It means the initial market reaction seems small and less than the daily
standard deviation of returns for many stocks. If manager buyback shares because of
undervaluation for other reasons, it is likely to be in expectation of a larger price increase. The
long-term, the average 3-year buyback abnormal returns are 38.82% to the market index and
44.30% relative to the market model for all repurchasing firms. The result indicates that the
market adjusts slowly in the short run and the long-term price performance is positive. Zhang
(2005) investigates share price performance surrounding and following actual share
repurchases. The paper uses data from 135 firms that have made 3628 daily repurchases in
Stock Exchange of Hong Kong from September 1993 to August 1997. The paper analysis
basing on short-term (using 250 days of return data, from 270 to 21 days prior to the event
study) and long-term (three years following the actual repurchase month). With short-term,
the paper used the market model to calculate the cumulative abnormal returns. The paper
suggests the firms tended to repurchase share when their stock relatively underperformed
the market with the CAR (-20, -1) is -1.84%. After the announcement, the average CAR
(0,2) for the three-day event period is 0.43%. This means the market responded positively to
the actual repurchases. And the 21-day return CAR (0, 20) is 0.69%. This mean, the average
short-term market response to actual share repurchases is significantly positive, but the

magnitude of the market reaction is not very big. In the long-term, the paper analyzes the
power and specification of test statistics for detecting long-run abnormal stock returns under
three measurement benchmarks: reference portfolios, control firms, and the Fama-French
three-factor model. They suggested that the buy-and-hold returns following actual share
repurchase events up to three years. Buy-and-hold abnormal returns are calculated basing on
firm size and book-to-market value. The result of long-term that managers of value firms
can deliver superior performance to long-term shareholders. The three-year buy-and-hold

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abnormal return, which is measured against a portfolio of control firms that are matched by
size and book-to-market value ratios, is over 20%.
According to Grullon and Michaely (2004) stated that the earnings-per-share impact
is an important factor in determining their repurchase decisions. When conducting share
repurchases, the EPS of a company tends to increase because the number of shares increases
proportionately more than the earnings decrease as a result of a decline in interest income
arising from the lower cash position. In seasoned equity offerings, especially in cases where
the share is used as a part of employee remuneration and not corporate investments, the EPS
impact tends to be negative. It is due to aforementioned EPS impacts that companies are
much more likely to rely on share repurchase as a means of obtaining shares to cover
employee stock option compensation rather than seasoned equity offerings.
Maxwell and Stephens (2003) have identified a relationship between repurchases and
wealth transfer between a firm’s equity and debtholders. Maxwell and Stephens (2003)
observed wealth expropriation through reaction in stock prices and bond markets to share
repurchase. Their studies found that on average bond returns fall by 18.5 basis point (at 1%
significance level) around the time of the repurchase announcement, additionally, bond

ratings, following a repurchase announcement, are more likely to be downgraded than
upgraded.
There are other papers that look at the effects of share repurchase announcement
specific to the market. In my paper, I will investigate the share repurchase announcement
effect on various consecutive events in Taiwan. The other point of my research is focused
on the firm’s consecutive behavior, compares before and after having an event.

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Chapter 3 Data and Methodology
This part of the paper contains a description of the underlying dataset that will be
employed for the event study and the cross-sectional analysis. This thesis is intended to
examine the effect of open-market share repurchase announcements in Taiwan. With the aim
of this paper, this thesis will use 2 methods to derive the excess returns, namely the market
adjusted returns model and GARCH risk adjustment model. As a result, this part divided
into two parts: one is data using in my thesis and the other is event study methodology on
abnormal returns.
3.1 Data
For this research, a dataset of share repurchases focusing on the various consecutive
events in Taiwan has been constructed. The sample is constructed from TEJ database for the
announcement of intention to repurchase share, stock distribution, SEO, and bond issuing.
The sample period covers 16 years between 2000 and 2016. The databases complement each
other and other isolated announcements are adding from TWSE classification index and TSE
Taiex is using as local market indexes for Taiwan stock market, respectively. In order to
conduct the event study and regression analysis in the later part, the companies selected
should have enough information to investigate the share price effects. Therefore, the share

prices from 250 until 10 business days before the event date should be available as the
estimation window.
Table 1 Summary Statistic
This table describes the summary statistics for announcements repurchases, stock distribution, SEO
and Bonds during 2000-2016 for Taiwan

Events
Repurchase announcement

2858

Stock dividend distribution

4835

SEOs

610

Corporate bond

809

Convertible

629

As a result, there are 2588 companies take part in TEJ from 2000 to 2016 into having
2858 share repurchase events, 610 SEO events, 4835 stock events, 809 corporate bonds, 629
convertible bonds. The firms announce SEO at time t and then repurchase in the next year

have 105 events. The firm’s issue bond at time t and then repurchase in next year have 299
events (include 92 with the corporate bond and 207 with the convertible bond). The firms
stock dividend distribution at time t and then repurchase in the next year have 555 events.

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3.2 Event study
This thesis began with the literature review of the theories and current research on
the effect of open market repurchases announcements on stock prices and the consecutive
effects on stock prices. In these descriptions, the motives for firms to repurchase their stocks
were discussed as well as the fluctuation Taiwan abnormal stock returns around the
announcement day. The main goal of this thesis is to estimate the price impact of open
market share repurchases. The price impact has been investigated in the short-term, around
the announcement of the share buyback program. Event study methodology has been
performed in order to detect information about share price behavior on the event day and to
define whether trends appear in the times surrounding of the event period.
An event study is a statistical method to assess the impact of an event on the value
of a firm. Event study analyses differentiate between the returns that would have been
expected if the analyzed event would not have taken place and the returns that were caused
by the respective event. An event study is conducted to measure the influence of a specific
event on the value of a firm. The purpose of event studies is to test for the existence of an
information effect and to identify factors that explain changes in firm value on the event
date. Campbell et al. (1997) suggested that a typical event study is conducted by first
defining the event and establishing the event window. This means to establish exactly what
the event is and determining the period during which share price will be affected by this
event. The price impact has been investigated in the short-term, around the announcement

of the share buyback program. Event study methodology has been performed in order to
detect information about share price behavior on an even day and to define whether or not
trends appear in the times surrounding of the event period. Return are indexed according to
the dates in the events window, with the event date at t. The event date is equal to the
announcement of the open market repurchase.
Although other measures can be and have been used, an event study typically
examines the stock price change for a sample of firms experiencing a common type of event
(Kothari and Warner 2007). Stock market data are used here for expositional purposes.
Abnormal or unexpected return in a period surrounding the event is used to provide a
measure of the unanticipated impact of the event on the wealth of the firms’ shareholders or
other stakeholders. The abnormal return (AR) is defined as the realized return minus the
expected or normal return, with the latter determined by a variety of expected return models.
Although the focus has been on the mean (in cross-section or over time) AR around the
occurrence of the event, other measures such as the change in returns variance and trading
volume have also been used. The basic steps for an event study are as follows: (1) Define
the event of interest and identify the event date. (2) Define the event window (the period the
researcher wants to focus on when examining the effects of the event) and the estimation
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window (the period during which the parameters of the expected return model are estimated).
(3) Select the sample firms, eliminating those that have confounding effects or contaminating
events. (4) Calculate the Abnormal returns and Cumulative abnormal returns. Where nonstock market measures are used the performance measure for the pre- and post-event
periods, possibly after controlling for other relevant factors, needs to be computed. (5)
Aggregate the ARs in cross section and/or over time. (6) Determine the statistical
significance of the aggregated ARs.
(Estimation Window)

(Event Window)

-10

-250

0

(Post-Event Window)

+10

Pre-announcement window

Prost-announcement window

0

-10

+10

3.3 Methodology
To assess the market reaction to the share- repurchase announcement, I employ the
Market Index Adjustment model and GRACH Risk Adjustment model to compute the
abnormal return. Figure 1 shows the timeline of an event study that using the thesis. The
event window to [-10, 10]. With the GRACH, the estimation window spans from days -250
to day 0.


The Market Index Adjustment Model

The market model is used to estimate the coefficients. The market adjusted model
assumes that alpha is set equal to zero and beta to one De Jong et al. (2011).
The market adjusting model is described as follows a single factor market model:

ARit  Rit  Rmt

(1)

E( it )  0

(2)

Var ( it )   2

(3)

Where i stands for the firm, t stands for time, m stands for the market, i is the
constant, i is the beta for each firm. Rit is the return of the stock of observation i on day t
(for t = -10,10). Rmt is the return of the reference market on day t,  it is the error term (a
random variable) with expectation zero and finite variance.
In the Market Adjusted Model, the observed return of the reference market on day t.
Rmt is subtracted from the return Rit of the observation i on day t.
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

The Generalized autoregressive heteroscedasticity (GARCH) model

The GARCH Risk Adjustment model has been found to provide a good description
of the variance of daily stock returns. In this model, any large shock to a share price which
causes an exceptionally high or low abnormal return on a particular day, also causes the
variance of returns to be high on the following day, and to decay only slowly back to its
long-run average “unconditional” value (Bollerslev 1986).
In the GARCH risk adjustment model with a single factor market model with
GARCH (-10,10) errors is estimated, namely:

Rit  i  i  Rmt   it .

(4)

The conditional variance may be written as:

 t2     1 *  2  1 * t21

(5)

t 1

with

 t2

is the event to returns on day t of event i,



the intercept, and

2

t 1

the most recent

squared stock,  t21 is the variance of the previous day. Parameters are estimated by
maximum likelihood (a non-linear solver is used for the optimization problem). In the
GARCH model, a large shock to returns will raise the variance of returns will raise the
variance of returns on the day following the event.
The abnormal returns are the crucial measure to assess the impact of an event. The
general idea of this measure is to isolate the effect of the event from other general market
movements. The abnormal return of firm i and event date is defined as the difference between
the realized return and the expected return has given the absence of the event:

ARit  Rit  E[ Rit | it ]

(6)

The expected return is unconditional on the event but conditional on a separate
information set. Dependent on the definition of the information set and the functional form
there exist various models of the normal return. Those models are extensively discussed in
the following section.
The next step is to calculate the cumulative abnormal returns (CAR) by summarizing
the abnormal returns in the event window identified by each announcement. CAR is the sum
of abnormal returns during the event window periods.

t2

CARt   ARit

(7)

t t1

Time periods are used to investigate the timing effect of share repurchase and it spans from
-10 to 10 day surrounding the event date which is the short term.

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Chapter 4 Data Analysis
This chapter presents the data analysis based on the daily share prices of the
companies that have announced share-repurchase and are listed on TEJ. The analysis uses
the event study methodology and descriptive statistics to test the effect of the announced
buy-back on the share prices of the companies. Event study methodology determines
whether there arises the positive or negative abnormal return around the announcement
repurchase stock event by defining an event window covering a period of days before and
after the actual event date.
4.1 Whole market impact of announcement repurchases
My thesis carried out was to establish the effect of open announcement repurchase
stock listed on TEJ. The data collected to facilitate the study was the daily share prices of
the companies for the period from 2000 to 2016 and the TSE Taiex. This section presents
the short-term price impact of share repurchase transaction. In table 2, I present the abnormal

share price performance surrounding the repurchase event day for the full sample.
In Figure 1 shows ARs and CARs analysis by the Market Index Adjustment model
of the whole market around the announcement repurchase in event window [-10,10]. Before
the announcement, ARs was the gradual decrease. The ARs touched the lowest in the day 2 is -0.517. ARs was the increase from the day -1 and increased dramatically hitting a peak
is 1.8115 in the day +1. After ARs was decreasing but was positive.
The empirical results show that the entire sample yields a significant negative CARs
on the following periods day -1 to day 0. This means that stock price is clearly undervalued.
On the other hand, a significantly increase CARs is noted on day +1 and the day +2. This
shows that stock repurchase announcements cause a significantly positive response from the
market. From -10 to -1, CARs is negative. The similar fluctuate of ARs, CARs was sunk to
a bottom in the day -1 is -3.2553. On the announcement day, CARs was slightly increased
from -3.4279 to -3.2533. After the announcement, CARs was increased. In the day +1, CARs
was suddenly surged (from -3.2533 on the announcement day to -1.4418 in the day +1).
The figure 2 and table 3 below illustrates the ARs and CARs of repurchase
announcement of the GRACH Risk Adjustment Model in the event window [-10,10]. ARs
of the GRACH Risk Adjustment model was negative from -10 days to -1 day. On the
announcement day, ARs was slightly decreasing (from -0.3417 to 0.2363). ARs reached the
highest point in the day +1. From the announcement day, ARs was quickly increased in the
day +1 (from 0.2363 to 1.8927). After the day +1, ARs was around 0.2. CARs of the GRACH
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The Announcement Effects of Share Repurchase based on the Prior Consecutive Events

Risk Adjustment model was similarly fluctuation of CARs of the Market Index model.
Before the announcement day, CARs was decreasing and fallen to a low in the day -1 (2.9174) and surged in the day +1 (from -2.6812 to -0.7885). Before the day +3, CARs was
the positive and gradual increase.
Both of model, CARs was waved. The bottommost mark in the day -1 and reached
the highest point in the day +1. The Market Index Adjustment model, after 2 days

announcement, CARs was insignificant while CARs of the GARCH Risk Adjustment model
was the slight rise.

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