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Prediction of open market share repurchases and portfolio returns: evidence from France, Germany and the UK

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Abstract

This study uses logistic regression for the development of prediction models that distinguish between share-repurchasing and non-share repurchasing firms. The estimated models form the basis for an investment strategy, according to which one invests on the stock of the firms that are predicted as repurchasing ones. Using a sample of firms from the UK, France, and Germany, the results show that this strategy generates positive and statistically significant abnormal returns over different investment periods that range between 1 and 18 months.

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Notes

  1. In general, the literature is rich with studies linking repurchases to insider trading activity (Pettit et al. 1996), patriotism (Gu and Schinski 2003), opportunism of controlling shareholders (Kim et al. 2013), stock options (Lee and Alam 2004), etc.

  2. Our study is not the first to investigate whether abnormal returns can be earned from the prediction of important corporate events. Katz et al. (1985) examine the usefulness of bankruptcy prediction models in investment strategies, while other recent studies focus on the prediction of takeovers (e.g. Powell 2001; Ouzounis et al. 2009). However, a model specifically designed for open market share repurchases is necessary for at least two reasons. First, the results of the bankruptcy and takeover studies are mixed. Second, there are important differences between those corporate events, leading to differences in the models’ predictive ability and the market reaction to such announcements and events.

  3. Another drawback of the study by Andriosopoulos et al. (2012) is that cross-validation resampling technique that they use, does not allow them to examine the out-of-time performance of their model. However, testing the model simultaneously out of sample and out of time is crucial when one aims to use it in the context of an investment strategy.

  4. Stephens and Weisbach (1998) investigate the implementation of open market share repurchase programs in the US market and find that firms repurchase either a substantial fraction of the announced shares or almost none at all. Bhattacharya and Dittmar (2003) argue that firms make the announcement but not repurchase because the firm has already attracted the wanted scrutiny from the market. This is supported by Chan et al. 2007, who find that firms repurchasing their shares during the first year of the year of the repurchase announcement, experience lower abnormal returns compared to firms that do not repurchase their shares. Hence arguing that firms do not repurchase their shares because the market has reacted quickly to the signal and therefore the firm cannot take advantage of an undervalued price.

  5. The study focuses on this period because it was not until 1998 that share repurchasing was allowed to take place more freely in both Germany and France. The Perfect Analysis and Factiva databases report any news announcements that were available in the press made by UK and European firms. Only firms that announced their intention to repurchase ordinary shares were included in the sample. The list of repurchasing firms that formed our starting basis was initially used in the study of Andriosopoulos and Hoque (2013).

  6. We replicate our estimations by using alternatively the market-adjusted returns during the 1-year period prior to the announcement (days −261 to −2) and the smaller timeframes −42 to −2 days (2 months), and −22 to −2 days (20 days) prior to the announcement of intention to repurchase. In all cases, the results remain the same.

  7. We do not employ longer time-horizons as longer horizons clash with the 2007–2009 financial crisis which would contaminate and distort our results.

  8. We would like to thank an anonymous reviewer for recommending the estimation of the second specification. Due to missing data, the estimation sample for this specification includes 124 UK firms, 84 French firms, and 54 German firms. The corresponding figures for the holdout sample are: 719 (UK), 384 (France), and 349 (Germany).

  9. For brevity we only present the results obtained from Specification 1. As expected, the results of Specification 2 have very poor performance due to the low specification accuracies in the holdout sample. Both the BAHAR and the Fama and MacBeth results for Specification 2 are available from the authors upon request.

  10. This portfolio actually includes 213 firms due to missing values in four cases.

  11. The standard errors are adjusted for heteroskedasticity and autocorrelation based on Newey and West (1987).

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Acknowledgments

We would like to thank an anonymous reviewer for valuable comments that helped improve earlier versions of the manuscript.

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Authors and Affiliations

  1. Department of Accounting and Finance, University of Strathclyde, Glasgow, UK

    Dimitris Andriosopoulos

  2. Department of Economics, University of Crete, Crete, Greece

    Chrysovalantis Gaganis

  3. Surrey Business School, University of Surrey, Guildford, UK

    Fotios Pasiouras

  4. Financial Engineering Laboratory, Technical University of Crete, Crete, Greece

    Fotios Pasiouras

Authors
  1. Dimitris Andriosopoulos
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  2. Chrysovalantis Gaganis
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  3. Fotios Pasiouras
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Correspondence to Dimitris Andriosopoulos.

Appendix

Appendix

See Table 6.

Table 6 Definition of independent variables used in the logistic regression models
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Andriosopoulos, D., Gaganis, C. & Pasiouras, F. Prediction of open market share repurchases and portfolio returns: evidence from France, Germany and the UK. Rev Quant Finan Acc 46, 387–416 (2016). https://doi.org/10.1007/s11156-014-0473-1

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