Tài liệu 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. i FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 ii FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 iii FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 iv FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 v FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 vi FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 2 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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. 3 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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. 4 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events (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. 5 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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. 6 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 7 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 8 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 9 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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 10 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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. 11 FCU e-Theses & Dissertations (2018) The Announcement Effects of Share Repurchase based on the Prior Consecutive Events 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. 12 FCU e-Theses & Dissertations (2018)