Can Managers Time the Market? Evidence Using Repurchase Price Data (Digest Summary)

In an exhaustive study of US stock repurchases covering the period 2004–2011, the authors compare the actual monthly average repurchase price with the stock’s average market price over various time horizons and find firms to be advantageous buyers. The greatest discounts are attained by firms that are less frequent repurchasers, by those repurchasing simultaneously with insiders buying on their own accounts, and/or by those that experienced low stock returns prior to the repurchases. Controlling for risk factors, the authors find that repurchasers earn positive returns, with the highest rewards earned up to three years following the repurchase by infrequent buyers.

How effectively firms intervene in security markets is a perennial and extensively studied topic in corporate finance. Debate on repurchases has been inconclusive and thus ongoing, principally because of methodological considerations (e.g., measurement in cases where repurchases are announced but never consummated or the judgment of returns is based on a variety of possible time intervals). Although the complexities of the involved variables (manager motivations, interaction of individual firm and market effects, information asymmetries, and so forth) probably preclude any study from settling all substantive points of contention, this latest effort is careful, thorough, and well designed. It thus offers real promise to both corporate officers and investors in providing accurate guidance about when firms can most efficiently manage their financial resources and when shareowners can parlay those initiatives into parallel investment strategies.

Specific estimates of the timing effects—in the range of a 2%–6% price discount gained by the firm along with a positive and significant alpha of 0.3% monthly for the 3- to 36-month interval after repurchase—are documented. But notions of market efficiency are not thereby repudiated because the authors show that returns are available as a consequence of market overreaction to negative information that is available prior to repurchases and not as a consequence of mere assertions by management that shares are currently undervalued. And in alignment with shareholder interests, firms took advantage of market downturns by capitalizing on the concurrent discounts in share pricing. So, the research’s congruence with theory fundamentals supports the validity of the authors’ quantitative findings.

Using monthly data on stock repurchases and corresponding CRSP stock price information before and after buying dates, the authors comprehensively analyze transactions of all open market repurchase programs of US firms between 2004 and 2011 for the most complete overview of the topic ever conducted. Market timing is assessed via comparison with the average daily closing price of the repurchased stock for the month it is acquired and the one-, three-, and six-month milestones surrounding (i.e., before and after) the repurchase. Detailed histories on the amount and timing of repurchases are also compiled to gauge the frequency of these stock buys. Insider purchases and public statements by management provided as justification for repurchases are both tracked. Summary statistics on sample firm financial characteristics are compiled to categorize firm risk profiles on such dimensions as liquidity, leverage, profitability, and degree of over- or undervaluation. Analyst coverage and earnings estimates for the sample companies are also collected.

The authors run a series of regressions to gauge market-timing efficacy, followed by additional estimation of cross-sectional variation along the dimensions of insider trading, extent of announcement effects, stated motivations for repurchase, market expectations (via analyst opinions), and information asymmetry, as well as post-announcement repurchase patterns. As proxies for market risk, the Fama and French regressions and their three associated factors are applied to gauge persistency for a longer-run assessment of returns at annual intervals out to three years after repurchase. Finally, a price support hypothesis is tested as an alternative explanation to market timing, and the evidence does not support it.

Thanks to the authors’ thorough and careful methodology and the fairly persuasive findings supporting the rewards of market timing via repurchases, several interesting questions ensue: Can the historically available gains be arbitraged away by investors who drive up prices as they follow the purchasing signals? Should repurchase programs be a priority for shareholder activism, and should corporate managers be judged on their related performance? How can managers be induced to desist from fruitless stock price support programs when the greatest apparent gains from market timing come following significant price declines? These research findings will generate and merit further consideration.