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Essays on Corporate Share Repurchase and Household Portfolio Choices

Essays on Corporate Share Repurchase and Household Portfolio Choices
Author: Weiwei Zhang
Publisher:
Total Pages: 280
Release: 2017
Genre:
ISBN:
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This dissertation consists of two empirical essays and one theoretical essay. In the first essay, I investigate how sensitivity of CEO's pay-for-performance compensation to stock prices affects firm's payout and investment policies. On the company's payout side, we find that higher delta CEOs tend to execute more share buybacks and pay fewer cash dividends. The evidence supports the notion that stock price sensitive executives particularly favor repurchases as the payout form. On the investment side, we find that higher delta CEOs allocate more money towards share buybacks, direct fewer investment resources to capital expenditures, and cut back employment. Additionally, repurchasing firms experience deterioration in operating performance subsequently following the repurchases. Our result suggests that the sensitivity of executives' compensation to stock price induces CEOs to favor short-term performance over long-term performance. In the second essay, I use an ex-ante and forward-looking stock mispricing measure to examine whether and how equity misvaluation affects corporate stock repurchase activities. In particular, we obtain the equity mispricing measure P/V by normalizing prevailing stock price with the firm's intrinsic value based on Residual Income Model (RIM). In particular, I find that undervalued firms are more likely to conduct buybacks and tend to repurchase more in terms of the percentage of market value of equity and dollar volume of the repurchase. These evidence suggest that equity undervaluation serves as a significant determinant for companies to undertake actual stock repurchase. The primary goal of the third essay is to explain family investment decisions under the assumptions of household member's preferences and efficient risk sharing among them based on the collective household model. By examining the absolute (relative) risk aversions of household welfare function, we demonstrate how household's portfolio allocation in stocks changes with family wealth. This paper examines two types of preference heterogeneity between spouses: parameter heterogeneity and functional form heterogeneity. This study offers an alternative explanation of household portfolio choice corresponding with the observation that wealthier households tend to hold greater share of family wealth in risky assets.

Two Essays on Share Repurchases, Diversification Discount and Analyst Cash Flow Forecasts

Two Essays on Share Repurchases, Diversification Discount and Analyst Cash Flow Forecasts
Author: Huoxin Wang
Publisher: Open Dissertation Press
Total Pages:
Release: 2017-01-27
Genre:
ISBN: 9781361385371
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This dissertation, "Two Essays on Share Repurchases, Diversification Discount and Analyst Cash Flow Forecasts" by Huoxin, Wang, 王火欣, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: This thesis consists of two essays. The first essay examines the effect of share repurchase on the diversification discount of multi-segment firms. The second essay investigates how firms' decisions of share repurchases are influenced by analysts' cash flow forecasts (CFF). In the first essay, I investigate the relation between the market reaction to share repurchase announcements and multi-segment firms' diversification discount. Prior studies have shown that information asymmetry causes a large diversification discount (measured as the negative value of firm excess value). Meanwhile, previous literature suggests that share repurchase announcement is a credible and efficient way in mitigating information asymmetry, with market reaction to share repurchase announcements being more positive for those firms subject to severe information asymmetry. These evidence leads to my conjecture that share repurchase can effectively decrease the diversification discount of multi-segment firms. This conjecture is supported by my empirical results. In addition, the cross-sectional analyses show that the positive correlation is less pronounced for firms with lower credibility of share repurchase announcements. In the additional analysis using a matched sample, I find that diversification discount decreases significantly for firms with share repurchase announcements in post-announcement periods while there is no decrease for the match sample of non-repurchase firms. Further analyses show that my conclusions are mainly driven by diversification discounts (i.e., negative firm excess value) instead of diversification premium (i.e., positive excess firm value) and that as a response to higher diversification discount, firms are less likely to announce share repurchases and more likely to refocus their business lines. The second essay examines how analysts' cash flow forecasts (CFF) affect firms' decisions of open market share repurchases. I find that the likelihood of share repurchases decreases in the presence of CFF. This negative relation is more pronounced for firms with worse information environment, weaker corporate governance, and more severe financial constraint. In addition, within the sample firms with CFF, the negative correlation exists between the likelihood of stock repurchases and the prevalence of CFF, measured by the ratio of the number of analysts issuing CFF among the number of analysts following the same firm and the ratio of CFF frequency relative to the frequency of earnings forecasts. Moreover, using a matched sample, I document a lower likelihood of stock repurchases after the initiation of CFF. Furthermore, I predict and find that the stock repurchase announcements are more credible for firms covered by CFF, as evidenced by higher actual stock repurchase ratio and better firm performance in the following periods. Lastly, I show that the substitutive effect of CFF on stock repurchase announcement is more pronounced when CFF are optimistic. DOI: 10.5353/th_b5312321 Subjects: Stock repurchasing

Two Essays on Stock Repurchase

Two Essays on Stock Repurchase
Author: Hongsong Neuhauser
Publisher:
Total Pages: 69
Release: 2009
Genre:
ISBN:
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In the U.S., stock repurchases, as a major cash distribution mechanism of public companies, have exhibited a rising trend that is insensitive to both the increase and decline of the stock market. In this dissertation, we study firms' actual repurchase activities for the period of 1983 to 2008 using both annual and quarterly financial information, combined with insiders fillings with SEC. Our findings suggest a much profound reason to better elucidate firms' actual stock repurchase activities. We find that executive options (but not employee) play a large and significant role in explaining the firm's actual repurchases. More important, we find a positive and significant relationship between timing of executives' option exercises and their firms' level of actual repurchases during the same period. Our results are robust and not driven by methodologies used in measuring stock repurchases, option grants, and option exercise factors, in variable definitions or classifications of firms, nor by sample time periods. Last but not least, we find that actual share repurchase activity (as opposed to repurchase announcements) is not consistent with other hypotheses for stock repurchases, including: (a) flexible substitution for dividends; (b) correction of undervaluation; and (c) disgorging of free cash flow. This evidence has important implications for the ongoing debate regarding the fairness of executive compensation. Finally, our evidence demonstrates the justification of further regulation on actual stock repurchases for the improving of the transparency and the efficiency of security markets.

Two Essays on Stock Repurchases and Insider Trading

Two Essays on Stock Repurchases and Insider Trading
Author: Shrikant Prabhakar Jategaonkar
Publisher:
Total Pages: 222
Release: 2009
Genre:
ISBN:
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ABSTRACTThe objective of my two essays together is to examine whether the trades made by the insiders prior to open market repurchase (OMR) announcements contain information that can be used to identify the repurchases that are motivated by undervaluation. The existing literature on shares repurchases suggests that while undervaluation has been a dominant motive behind repurchases for past few decades, identifying these undervalued firms still remains a challenge. The book-to-market ratio is commonly used as a proxy for mispricing; however, its ability to identify undervalued repurchasing firms has recently come into doubt (Chan et al., 2004). Instead, I propose using proxies based on insider trading to identify the undervalued repurchasing firms. In the first essay, I document a relation between insider trading and both the short- and long-run stock returns of open market repurchasing firms. My findings suggest that the personal trades made by insiders prior to the OMR announcements contain information that can be used to identify undervalued repurchasing firms. I use various measures of insider trading and show that firms with high (low) insider buying (selling) prior to repurchase announcements earn abnormal stock returns in both the short- and long-run. I also find a positive (negative) relation between insider buying (selling) and the actual repurchasing activity of the firms. In my second essay, I further test whether the trades made by insiders prior to OMR announcements contain information that can be used to identify the repurchases that are motivated by undervaluation by examining the post-announcement operating performance. I find a relation between insider trading and the post-announcement operating performance for the OMR firms that is consistent with the hypothesis that insiders' trades prior to OMR announcements are informative. Specifically, I find that firms with high insider buying prior to the OMR announcements outperform their corresponding control firms, whereas, firms with low insider buying do not. In addition, I test for a relation between insider trading and (a) the accruals management around OMR announcements, and (b) the market reaction to the earnings announcements made by the OMR firms. I find a weak evidence of insiders timing their trades along with accruals management. However, the market reaction to earnings announcements made by the OMR firms does not seem to vary with level of insider trading. Overall, the evidence is consistent with insiders of repurchasing firms knowing when their stocks are undervalued and they timing both their personal and firm level trades accordingly.

Two Essays on Share Repurchases

Two Essays on Share Repurchases
Author: Alice Bonaimé
Publisher:
Total Pages:
Release: 2008
Genre:
ISBN:
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These results suggest that in certain cases managers may use share repurchases to advance their own agendas, as opposed to shareholder agendas. This study also investigates long run abnormal returns for repurchasing firms by direction of net insider trades. The findings are consistent with insider trades either validating or negating the undervaluation signal of the share repurchase: Repurchasing firms with concurrent net insider buying experience average buy and hold abnormal returns of 4.95, 2.13, 1.72 percent during years one, two, and three, respectively, after the repurchasing quarter compared to 0.41, -0.88, - 1.85 percent for repurchasing firms with simultaneous net insider selling.

Two Essays on Stock Repurchases and Insider Trading

Two Essays on Stock Repurchases and Insider Trading
Author: Noel Pavel N. Jeutang
Publisher:
Total Pages: 101
Release: 2014
Genre:
ISBN: 9781303864315
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The first essay examines how the outcome of prior repurchasing activity influences future repurchasing decisions. We find strong evidence that future decisions to repurchase equity are negatively influenced by poorly timed past repurchases. Specifically, we show that the past losses on stock repurchases reduce the propensity to engage in additional repurchases in the future. We find almost no evidence that past gains on repurchases positively or negatively influence future repurchasing activity. These results are robust to various firm characteristics, estimation and sampling methods. Further analyses show that losses on past repurchases influence dividend policy. We show that the dividend-repurchase substitution rate slows down for firms that experience losses in their past repurchase activities. Overall, results suggest that managerial behavioral biases have a strong influence on future repurchase decisions consistent with the loss-aversion concept of prospect theory.