Abstract

This paper employs a conditional event study to analyze managers' motives to announce a share repurchase while at the same time exploring the factors that drive a firm's abnormal announcement return. We find that firms that have more free cash flow and less debt are more likely to initiate a repurchase. We also document that the market reacts more positively to announcements made by firms that exhibit poor pre-announcement stock price performance as well as firms that seek to buy back a higher percentage of shares. We do not find any significant positive correlation between managers' private information and unexplained abnormal returns, which suggests that the market's discovery of insiders' private information has already been incorporated into abnormal returns, or that the announcement return may be explained entirely by public information as predicted by the agency hypothesis. This study also provides complementary evidence on the information content of open market repurchases by analyzing insider trading activities around the repurchase announcements. We show that in general, insiders in repurchasing firms tend to decrease their selling activity and increase their buying activity before repurchase announcements. After the announcement, the differences in insider trading activity between repurchasing firms and non-repurchasing firms are largely insignificant