Read the working paper
INSEAD Working Paper 2015/70/DSC
We examine the behavior of stock returns after share buyback announcements. In line with the existing literature, we find evidence of abnormal returns after buyback announcements1. A market neutral portfolio that is long equally weighted (with daily rebalancing) all companies that announced within the most recent month and short the IWM ETF/market using a rolling β estimated from the recent 250 days has average annual "abnormal" returns of 11.6% with a Sharpe ratio of 1.3 over the period from 2000-01-20 to 2014-12-31. Moreover, small value-stocks that under performed pre buyback announcement date outperform large growth-stocks that over performed pre buyback announcement date. A portfolio of the first type of companies, in which we hold stocks for one month after buyback announcement, shows annual "abnormal" returns relative to the IWM market index of 16.3% with a Sharpe ratio of 0.8 over the same period. A portfolio of the second type of companies has returns and a Sharpe ratio of 7.6% and 0.4, respectively, over the same period. Finally, we provide evidence that buybacks could potentially provide a signal for timing/predicting the overall market.