Sharing Profits: Timed Buybacks, Cumulative Abnormal Returns, and Shareholder Wealth

Abstract

Facing a massive rise in profits, firms have begun distributing cash to shareholders in record amounts, increasingly via share repurchases rather than dividends. This paper investigates whether corporate strategies governing the management of these repurchases have been beneficial to long-term investor wealth (beyond the short-term cash windfalls to the selling stakeholders), by employing an event study methodology to calculate the excess returns (CARs) surrounding open market repurchase announcements. The CARs are then modeled within several multi-factor ordinary least squares and weighted least squares frameworks, in which the primary explanatory factor is a created variable reflecting the utilization of timing strategy by the firm to coincide the buyback with relative undervaluation. Timed repurchases are shown to generate greater excess returns and thus shareholder wealth than untimed repurchases, and the findings are robust across multiple specifications and models. The wealth effects are further shown to be most notable over longer time horizons and concentrated by sector (specifically in technology firms). The results corroborate the theory of asymmetric information and support the existence of managerial expertise, while also suggesting that decisions regarding buybacks need not necessarily suffer from an intrinsic agency conflict. The findings carry implications for optimal corporate management and support the preservation of executive decision-making flexibility, especially to ensure the alignment of a firm's interests and those of its vested stakeholders.