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An examination of corporate stock buybacks: do they really create value?

1. Introduction

Although popular for over 25 years, corporate stock buybacks have accelerated in recent years, with billions of dollars in repurchases following the financial crisis of the late 2000s (Schwartz, 2011; Thomasson & Xydias, 2010). The proportion of cash flow used for repurchases has almost doubled over the last decade while it has slipped for capital investments and companies are predicted to spend an increasing amount on share buybacks and dividends this year, about 95 percent of earnings (Wang & Bost, 2014). Often touted and viewed as a value creating strategy, historical reports suggest that the longer term results of stock repurchases are fairly unpredictable. Empirical evidence has shown that positive abnormal returns often do accrue to companies announcing stock repurchase programs in the short term, but longer term value creation remains speculative and highly questionable. Given the extraordinary proliferation of this activity, the considerable amount of financial investment in stock repurchases, and the implications for stockholders, the market, and the economy, we are interested in examining stock buybacks specifically in terms of longer-term value creation. Is this really the best use of companies' cash? Do shareholders really benefit or do they receive the right to own part of a company with less cash? Several may benefit in the short term, including executives holding stock options, selling or non-selling shareholders, and activist investors, but is value really created for investors over the longer term?

Repurchasing outstanding stock from shareholders presents an alternative to capital expenditures, acquisitions, and dividends. This activity has always been debatable on a number of dimensions (e.g., why and how it is done, market manipulation, anomalies about pricing, role of corporate governance and boards of directors, fairness to all shareholders, etc.). Clearly, opportunity costs include investment in corporate growth, development, or renewal initiatives, and even the ability to retain existing employees. Robert Reich, former Secretary of Labor, and who now teaches public policy at the University of California, Berkeley, says, "It's an extraordinarily unimaginative way to use money." Further, while corporate boards justify stock buybacks for a number of reasons, questions remain as to their genuine efficacy (Yamate, 2013).

Investment (or capital expenditure) strategies must be rationalized as a means of increasing shareholder value over the longer term, yet many consider stock repurchases as a purely accounting driven strategy to increase share value without any change in the intrinsic value of the company. When corporate boards repurchase stock, investors likely consider this to be a signal that profitable investment projects are not available. Yet, corporate use of cash for stock repurchases has the potential, if not the reality, of reducing growth in a firm's operations over longer time horizons. Nothing about a stock buyback is related to increasing cash flows available to shareholders in the future. Grullon and Ikenberry (2000) note that the stock repurchase, if done with cash, can attenuate a firm's size and capitalization. Ultimately, on a larger scale, the cumulative effect of so many companies repurchasing stock as an alternative to increasing capital budgets can have a deleterious influence on the business investment component of aggregate demand in the economy, in addition to the labor force. Further, as a governance issue, a very important purpose of the corporate board is to provide advice relating to the future operations of the company and to protect shareholder value. If the intended results of stock buybacks vary unpredictably or do not lead to longer term value creation, perhaps boards should be held to a higher standard in approving these programs (Yamate, 2013).

Studies of the benefit to shareholder wealth as a result of the announcement of a pending stock buyback program are extant. But most of these studies only consider the short-term announcement's influence on abnormal returns. Indeed, several studies have shown that a positive drift in returns often does occur following share repurchase announcements (Lakonishok & Vermaelen, 1990; Stephens & Weisbach, 1998; & Vermaelen, 1981). These are generally attributed to the corporate disclosure that the firm is undervalued and/or that it has good future prospects, thus signaling to the market that shares are undervalued and thus a good investment. However, share repurchases can be motivated by other incentives (e.g., to avoid takeover threat, to counter the dilution effects of managerial stock options, to increase earnings per share by reducing outstanding share count, etc.), many of which fail to produce a positive market response even in the short term.

Long-run firm performance following open market share repurchase announcements has been explored by a few researchers with mixed findings. Ikenberry, Lakonishok & Vermaelen (1994) found that the market favored those stocks that were repurchased because of undervaluation but for those where undervaluation did not appear likely to be a motive, no positive returns were observed. Peyer and Vermaelen (2009) found significant long-run abnormal returns in the 48 months following buyback announcements, indicating that managers were honest in their claim that shares were undervalued. Although highly touted as a useful incentive for stock repurchases, both studies find that the market underreacts to announcements, suggesting that much of the information conveyed by open market share repurchases is actually ignored or mistrusted.

Interest persists, nonetheless, in the longer term impact of stock buybacks, given the anomalies and incongruences described above and the fact that the activity has become so prominent, involves enormous amounts of cash, and is a matter of public interest (Schwartz, 2011; Yamate, 2013). The purpose of this research is to explore the longer term effects of stock repurchase programs by examining changes in market capitalization over various reference periods. In the sections following, we examine the stock buyback as a possible means of value creation, as well as its potential to generate negative impacts. A literature review with hypotheses development leads to our study. Data and methodology, findings, and implications follow.

2. The Stock Buyback

A stock buyback is the repurchase of outstanding stock from shareholders. Most share repurchases are achieved over time through open market purchases and are often referred to as share repurchase programs or plans, although other methods are also used (e.g., fixed price tender offers, privately-negotiated repurchases, Dutch auctions). Following the announcement of a stock buyback, typically the actual buybacks will take place over a period of time. Dates of specific buybacks, as well as the program's completion, usually remain unannounced. Smaller stock buyback programs sterilize the issuance of stock to employees. Shares repurchased with cash, from operations or financial leverage, represent a purely financial transaction. The transaction is often referred to as one method of returning cash to shareholders and is usually done with approval of the firm's Board of Directors.

Highly popular, particularly in recent years following a dramatic economic downturn in the late 2000s, stock buybacks are traditionally justified as returning cash to shareholders, without increasing quarterly dividend requirements, and presented as a method of returning capital to shareholders in a more tax-efficient manner than declaring dividends. Conventional wisdom suggests that when stock price is in decline or is undervalued, the buyback will help to either increase or stabilize stock price, thus signaling to the market that shares are undervalued and thus a good investment. Another reason for a company to repurchase its shares is to dilute the impact of merger and acquisition activity and exercises of employee stock options. Corporate managers (and Boards of Directors) have considerable discretion to time the firm's stock repurchases to manage stock liquidity and benefit non-selling shareholders (De Cesari, Espenlaub, Khurshed, & Simkovic, 2012) or to increase diluted EPS (Bens, Nagar, Skinner, & Wong, 2003). This is accomplished by decreasing the denominator in the earnings per share calculation by the number of shares repurchased, resulting in a higher EPS, a metric that normally drives stock prices higher. Earnings per share is also a measure corporate boards use in determining executive pay. Safeway Inc. CEO Steven Burd received a $2.3 million stock award in early 2013, in part because he oversaw a 61% jump in EPS following a stock buyback (Thurm & Ng, 2013).

Critics argue that executives have too much leeway to inflate pre-share results through buybacks without actually improving their companies' operating performance. The Securities Exchange Act of 1934 (Sections 9a and 10b) prohibits fraudulent and manipulative practices in connection with an issuer's or "affiliated purchaser's" purchase and sale of the issuer's (company's) securities. However, Rule 10b-18 of the Exchange Act (adopted in 1982) provides a safe harbor for purchases when repurchases of the issuer's common stock in the market are made in accordance with the rule's manner, timing, price and volume conditions (Kanter, Vebman, Zeidel, Korff, Schwartz, & Clay, 2013). Clearly, in repurchasing shares an issuer may have an incentive to manipulate the price of its common stock. Such repurchases may subject an issuer to claims of manipulative behavior. However, an issuer may also engage in open market repurchases for many legitimate business reasons. Therefore, in 1982, the Securities Exchange Commission (the "SEC") adopted Rule 10b-18 to provide a non-exclusive safe harbor for issuer repurchases with the end result that it has become a common and popular practice, seemingly for both legitimate and manipulative reasons.

The practice transcends industry; thirty companies listed on the Dow Jones Industrial Average authorized $211 billion in buybacks in the year 2013. Included in this list are Apple Inc. ($10 billion in stock); Wal-Mart ($15 billion) Pfizer ($10 billion); Goldman Sachs ($10.8 billion), and others. Networking giant Cisco Systems spent $15 billion on a stock buyback program, an amount higher than its net income of $10 billion and 2 1/2 times what the company spent on research and development, while laying off 5 percent of its workforce, or 4,000 employees (Yang, 2013). With corporate profits high, large multinational companies are spending money on buybacks rather than investment, R&D, and on keeping employees. Following a $9 billion stock buyback, and a profitable year in 2011, Pfizer cut its research budget and laid off 1,100 employees (Schwartz, 2011). Companies in the Standard & Poor's 500 stock index spent nearly $408 billion on share buybacks in 2012. While net income for these companies grew on average 5% from the previous year, per-share earnings rose 6.1% (Thurm & Ng, 2013).

While easily rationalized as beneficial for companies and shareholders, negative implications are numerous and questions remain as to how and when capital returns to the investor. A number of recent studies suggest that, stated intentions aside, the results of stock buybacks vary dramatically; moreover, not all serve to boost or stabilize stock price (Yamate, 2013). Further, there are many disadvantages of stock buybacks. Stock buybacks may signal to investors that there are no profitable investment opportunities, or the economic climate looks dim, or that future earnings levels are weak (Hurtt, Kreuze, & Langsam, 2008). There are also the obvious concerns related to financing: tapping savings or issuing debt, overpaying, and/or downgrading by the ratings agencies. Finally, recent reports suggest that investors are not rewarding the strategy, as many companies are experiencing a sharp decline in share price post stock buyback programs (Schwartz, 2011). Add to these, the negative aggregate impact on the national economy, development, and employment levels.

3. Literature Review

Why do so many firms spend billions of dollars in stock buyback programs? Who benefits, and how? When financial markets are perfect, share repurchase programs do not appear to serve a reasonable purpose. As shown by Miller and Modigliani (1961), a firm's payout policy is irrelevant in a perfect market. Their theorem is widely accepted; firm value is determined by its earning power and the risk of its underlying assets, regardless of financing or capital structure decisions. Given the popularity of stock repurchases and the extraordinary extent of expenditures, several have sought to find answers to this conundrum. These approaches generally address taxation, free cash flow (or agency), governance problems, or asymmetric information (signaling theory) as possible explanations.

Prior to the 2002 tax reforms, repurchases were popular for firms wishing to distribute cash without subjecting them to high dividend taxes relative to the tax on capital gains. Still, a general trend continues to emerge that shows firms substituting repurchases for dividends, a practice that is increasing relative to dividend payouts (Grullon & Michaely, 2002; Jagannathan, Stephens, & Weisbach, 2000). According to the free cash flow hypothesis proposed by Jensen (1986), investors will not trust managers with excess cash even when environments present reduced investment opportunities. Managers may have incentives to invest in projects with negative NPV, reducing the firm's value. Thus, stock repurchases receive a positive market response, according to this theory, by minimizing the amount of cash managers control and reducing agency problems (Grullon & Michaely, 2004). Other reasons may include repurchasing stock to manage earnings when debt-financing constraints are present (Farrell, Unlu, & Yu, 2014) or to adjust capital structure in an attempt to create value in an undervalued firm (Bonaime, Oztekin & Warr, 2014).

If corporate governance is reliable, stock repurchases would only be approved if deemed to have potential for long term value creation. Corporate governance policy and boards serve an important role in approving these decisions, in reducing conflicts between managers and shareholders, and in providing credible information to investors. Several have explored market reaction as influenced by perceptions of good governance (Chahine, Zeidan, & Dairy, 2011; Webb, 2008), finding that market reaction generally is more favorable when accompanied by positive perceptions of corporate governance. According to signaling theory, firms will repurchase their own shares when managers have private information that the firm is undervalued and they want to signal this to their investors (Dittmar, 2000). Ikenberry, Lakonishok, & Vermaelen (1994) found a positive market reaction to repurchase announcements and attributed it to insider signaling that the stock price was low relative to its intrinsic value.

In terms of the short term market response, several studies have examined abnormal returns in a short event window attendant to the announcement of a stock buyback and most have found positive results. Short term results are modest, though, and average only 3.5% (Ikenberry, et.al, 1994). The signaling theory hypothesis motivated by asymmetric information and often used to explain why a corporation might buy back its own shares presents an anomaly. If the stock is undervalued, investors would then supposedly respond to a repurchase announcement and the stock price would adjust to the true value of the new information. As Ikenberry, Lakonishok, and Vermaelen (1994) point out, if prices adjust instantaneously, how can the repurchase be good for long term investors? In an efficient market, the stock should no longer be undervalued after the announcement. Grullon and Michaely (2004) suggest that the short term excess returns reflect not a signal about future earnings, but about reducing future risks. Ikenberry and Vermaelen (1996) argue that the repurchase program is an exchange option that gives the firm the ability to exchange its market value for its true value if, in the future, prices become lower than the true value. In this sense, the repurchase program serves as an "option," but it is not an option that creates any value (Oded, 2005).

Longer term market response to repurchase announcements has been less explored. Ikenberry, Lakonishok, and Vermaelen (1994) examined long term performance following open market share repurchases for the period 1980 to 1990 and found the buyback programs to be a value creating strategy. Average abnormal four year return for buy-and-hold investors was 12.1%; for companies likely to be repurchasing shares because of undervaluation, the average abnormal return was 45.3%. They conclude that for the undervalued stocks, the market erred in the short term evaluation of the repurchase announcements. Their findings provide evidence that on average, the market underreacts to open market share repurchase announcements, and that managers have timing ability. Oded (2005) found that positive longer run returns do accrue from informed trading but they do not offset the cost of the announcement incurred in the short run. Peyer and Vermaelen's (2009) exploration of long-run abnormal returns following open market share repurchases during the 1991-2001 period found significant long-run abnormal returns of 20% in the 48 months following the buyback announcement, and from the first month after the announcement onwards. Short term (3 day) returns for repurchasing firms with undervaluation motivation, however, were modest at 2.39% for the full sample. They conclude that for open market repurchases, investors do not trust managers who claim they are repurchasing shares because they are undervalued. It is the accord of several that managers do play honestly and the market should make better use of the information managers provide regarding stock repurchase programs and their rationale. Although evidence is limited, extant research does suggest that longer term value creation is possible.

However, it is interesting to note that nothing actually commits a firm to acquire shares after an announcement, yet the abnormal announcement return suggests the market holds it as good news (Oded, 2005). And, although the announcement is typically associated with a positive market response, many firms will either repurchase a small fraction of the dollar value announced or perhaps not repurchase at all. Open market repurchase programs are inherently flexible and have been criticized as weak signals lacking commitment. Chan, Ikenberry, Lee & Wang (2010) investigated whether they are intended to mislead investors and found that to be true for a limited number of managers; nonetheless, they did not find a long-run economic benefit to this behavior. In sum, most theories attempt to determine rationale for stock repurchases and some find support for short-term or modest benefits, but few answers are found as to the longer term results of a stock repurchase program and its true value creation.

Our interest in this study is in the longer term effects of stock buybacks over extended periods of time. Although a stock buyback may be reported in the financial press, it may never be completed as advertised. This leads to a bias in short-term event studies of stock buybacks. Investors might never know if the announced value of a stock buyback was completed or partially shelved and will usually not know the time period of the buyback. We have chosen to explore the longer-run performance effects during a period of time when companies' finances are strong enough to facilitate a stock buyback, through the time when the stock buyback can be completed, and a period of time following the stock buyback completion. Stock buybacks are usually done by companies in good financial and operational health. Given the findings outlined above, we hypothesize that:

H1-null. Long-run shareholder wealth is higher following corporate share buybacks as a result of higher earnings per share, ceteris paribus.

Still, while the decision to repurchase shares decreases the equity capital to assets ratio in which outstanding equity is reduced, it must be noted that actual debt levels remain the same. Accordingly, a stock buyback represents a capital structure change that results in increased leverage. As a result, this is increased risk and could account for lower market valuation. This is because capital, a scarce corporate resource, facilitates a financial maneuver rather than being reinvested into the business, thus reducing the potential for growth in cash flows available for shareholders. Another long term concern has to do with the leveraging effect. In a study by Chan, Ikenberry, and Lee (2004), a positive drift in returns following the share repurchase announcement obtained. The authors found firms announcing share repurchases tended to have lower leverage but these low leverage firms tended to not have higher positive return drift than higher leverage firms. When shares are repurchased, shares outstanding decline so there is an impact on a firm's market and book value equity capitalization. Thus, an increase in book value financial leverage is a potential manifestation of the decline in shares outstanding. This leads to the following hypothesis:

H1. Long-run shareholder wealth is lower following corporate share buybacks as a result of increased leverage, ceteris paribus.

Studies of the long-term influence of stock buybacks are important for many reasons. From a public policy perspective, cash used to facilitate share buybacks is not directly reinvested in the possible growth of corporate operations resulting in lower employment of a nation's resources. Corporate capital is a scarce resource and capital used to repurchase stock is not available for reinvestment and possible growth in future cash flows available for shareholders. Cash used decreases corporate liquidity as well as the opportunity to take advantage of investment opportunities. What if Apple Computer had repurchased significant stock in the period prior to its introduction of the product offerings starting in the early 2000s rather than reinvesting cash into these investment opportunities? Also, stock buybacks effectively introduce financial leverage and financial risk by leveraging a firm's capital structure. Many companies use debt offerings to facilitate a leveraged recapitalization attendant to the stock buyback.

4. Data and Methodology

Data are calculated (or Derived) based on data from CRSP 1925 US Stock Annual [C]2012 Center for Research in Security Prices (CRSP[R]) at the University of Chicago Booth School of Business. To identify firms with stock buybacks, we examine shares outstanding at the beginning and at the end of the period under study (the reference periods). We use a decline in shares outstanding during the reference periods as a proxy for stock buybacks occurring during the period of study. The initial data set is the universe of stocks in the CRSP[R] database. Several data steps are necessary in order to construct a final data set (the stock buyback portfolio) where a reduction in shares outstanding from the beginning to the end will serve as a proxy for a stock buyback during the period.

Since firms with stock splits, stock dividends, spin-offs or rights offerings (as defined in the CRSP[R] database) will influence shares outstanding these "event firms" are eliminated from the analysis. It is important to exclude spin-offs for the analysis because spin-offs represent value accretion to shareholders that will not be represented in this empirical method. Many companies might do a spin-off during a long reference period and these firms might be merger and acquisition activities. Stock buybacks done to sterilize employee share issuance should not meaningfully influence the analysis. These firms might be well managed and exclusion of these firms might introduce a bias in the analysis.

Ikenberry, Lakonishok, and Vermaelen (1994) examine long-term abnormal returns as a result of share repurchases. This is not possible with our sample since times and dates of corporate stock purchases are not disclosed. An alternative approach is to study the long-term change in shareholder wealth beginning with the announcement of the stock repurchase, however, this approach is problematic because some stock repurchases (often of a certain dollar amount) are announced and not fulfilled. Thus, we prefer to study the long-term influence of stock buybacks on shareholder wealth by assessing changes in shareholder wealth from the time of the stock repurchase to the end of a defined reference period. Our approach considers a time period before the actual stock repurchase and a time period following the stock repurchase.

Companies were included in the analysis as the stock buyback portfolio only if the CRSP[R] price adjustment factor was not missing, or, had a value of zero. Exchange traded funds, American Depository Receipts are not in the final data set. Only firms with common shares outstanding with a CRSP[R] "share code" of 10 or 11 populate the final data set. These restrictions should produce a data set where a decline in shares outstanding during the period is a proxy for stock buybacks during the period. For inclusion in the final data set shares outstanding must have declined from the beginning of the period to the end of the period. The number of companies used for any given period under study varies as influenced by the above inclusion criteria. The surviving companies are formed into a portfolio and equity market capitalization at the beginning and end of the reference period is the market valuation variable. This resulted in a multi-industry sample of 91 companies.

We use a methodology that is not dependent on an announcement of a stock buyback, or a company following through with a stock buyback. This is due to several reasons. For example, companies might announce a stock buyback and not completely follow through with open market or private purchases. Stephens and Weisbach (1998) find that firms acquire, within three years, an average of 74 to 82 percent of repurchase program shares announced. Babenko, Tserlukevich, and Vedrashko (2012) note that firms are more likely to complete the stock repurchase program if insiders have purchased stock.

Simkovic (2009) points out, that under the Exchange Act Release Number 33-8335, firms must report in quarterly releases information relating to share repurchases. He finds that following the Exchange Act Release it is more possible that firms actually follow through with their announced repurchases and their repurchases are completed sooner. Also, a company, following a stock buyback announcement, may make an announcement of an addition to the stock buyback program. The data universe might be influenced by companies that have issued stock during the period as a result of merger and acquisition activity. Some attenuation to this possibility is knowledge that some firms use stock buybacks to sterilize issuance of stock as a result of merger and acquisition activity. A bias in the study of stock buybacks on shareholder wealth is that at the time of the announcement the stock price rises and shares outstanding are not reduced (until the buyback). Our methodological approach reflects an attempt to circumvent these potential pitfalls. We define shareholder wealth as price per share times the number of common shares outstanding, so a longer-horizon analysis that includes the influence of the share buyback is necessary.

5. Results

A conventional event study analysis of the influence of the announcement of a stock buyback on shareholder wealth, following the methods of Brown and Warner (1985), using a sample of 91 companies reveals results similar to previous studies of share buybacks. In Table 1 we report results for three event windows and we find the mean CAAR positive and statistically significant. Also, the positive drift remains ten trading days following the announcement. We use the precision weighted CAAR as developed by Cowan (2000). The generalized z-statistic is nonparametric and described in Cowan (1992). Patell (1976) offers a method of test statistics associated with abnormal returns that we use in this study. We use SAS[R] software (SAS Institute Inc. (a), 2010) and Eventus[R] software (Cowan Research, 2012) to analyze the data.

The estimation period for abnormal returns is 100 days and the estimation period ends 26 days before the event date. The table shows results using the equal-weighted index. A robustness check revealed similar results using the value-weighted index. Abnormal returns for event windows (0, 0), (0, +1), and (0, +10) are shown. The symbols **, and *** denote statistical significance at the 1% and 0.1% levels using a 2-tail test.

Descriptive statistics for companies in the data set are shown in Table 2. Panel A shows the Quartile 1, Median and Quartile 3 market capitalization for the stock buyback portfolios associated with the reference periods. Panel B shows the Quartile 1, Median and Quartile 3 market capitalization for all other stocks associated with the reference periods. Panel C shows the Quartile 1, Median and Quartile 3 share change for companies with stock buybacks associated with the reference periods.

Panel A of Table 2 shows market capitalization for each reference period for firms doing stock buybacks. Panel B of Table X shows market capitalization for each reference period for all other firms in the data universe. Values for market capitalization in the Table should be multiplied by 1,000. Panel C shows a change in the number of common shares outstanding during the reference periods. This change is the basis for determining stock buybacks during the reference period.

The results of three five-year reference periods and three ten-year reference periods are shown in Table 3. Specifically, the table shows market capitalization changes for the stock buyback portfolio as well as the portfolio of all other stocks. We use the "PROC TTEST" procedure (SAS Institute Inc. (b), 2014) to test for the mean difference in the ending and beginning market capitalizations of the stock buyback portfolio and the portfolio of other companies. MCDSBP is the market capitalization difference from the beginning of the reference period to the end of the reference period for the stock buyback portfolio. MCDAOP is the market capitalization difference from the beginning of the reference period to the end of the reference period for the portfolio of all other stocks.

Values for MCDSBP represent the surviving companies in the data set that realized a decline in the number of common shares from the beginning to the end of the period, the CRSP[R] price adjustment factor was not missing, or, had a value of zero, are not Exchange traded funds or American Depository Receipts, and have a CRSP[R] "share code" of 10 or 11. N associated with the stock buyback portfolio (SBP) is the number of companies that had no stock splits, stock dividends, spin-offs or rights offerings (as defined in the CRSP[R] database) during the period. The t-statistic is a result of a two-tailed t-test for the mean difference of MCDSBP and MCDAOP. FEOV is the Folded F-statistic for equality of variances.

For five of the six reference periods the difference is statistically significant with a market capitalization loss for the stock buyback portfolio (SBP) and a market capitalization gain for all other stocks. For the ten-year reference period between both the stock buyback portfolio as well as the portfolio of all other stocks realized an increase. The increase in this reference period is less for the stock buyback portfolio. The portfolio of companies with fewer shares outstanding at the end of the reference period experienced a market capitalization decline in five of the six reference periods. The portfolio of all other stocks experienced a market capitalization increase in each of the six reference periods.

Should market capitalization normally decline following a stock buyback and the attendant share reduction? The purpose of the share buyback is to increase earnings per share. Assuming the firm's P/E remains constant the stock price should rise following the stock buyback. Market capitalization should rise if the share reduction is offset by a greater proportional stock price rise.

Data are divided into sets of large and small capitalization companies, as indicated in Table 4, using the market capitalization cut-off points of Moeller, Schlingemann and Stulz (2004). Ikenberry, Lakonishok, and Vermaelen (1994) examine abnormal returns for firms doing share buybacks by firm size. Panel A of Table 4, representing large capitalization stocks, shows t-statistics of market capitalization differences (from the beginning to the end of the reference periods) predominately significant in relation to the t-statistics in Panel B representing small capitalization stocks.

The market capitalization change (from the beginning to the end of the reference period) for the large capitalization stock buyback portfolio (MCDSBP) stocks in Panel A is negative for all reference periods except the 2003 to 2012 reference period. The market capitalization change (from the beginning to the end of the reference period) for the large capitalization portfolio of all other stocks (MCDAOP) stocks in Panel A is negative for all reference periods except the 2006 to 2010 reference period. In all reference periods the stock buyback portfolio performed more poorly than the portfolio of all other stocks. For 5 of the 6 reference periods the difference is statistically significant.

The market capitalization change (from the beginning to the end of the reference period) for the small capitalization, stock buyback portfolio (MCDSBP) stocks in Panel B are all negative. Only in the 2003 to 2012 ten year reference period is the difference between the stock buyback portfolio and all other smaller capitalization stocks statistically significant (in this case the market capitalization for the stock buyback portfolio fell by more than the portfolio of all other stocks). The influence on shareholder wealth is more pronounced among large capitalization stocks than small capitalization stocks.

Panels A and B separate the data into large and small capitalization stocks. The Panels show the results of a t-test for the mean difference in the ending and beginning market capitalizations of the stock buyback portfolio and the portfolio of all other stocks. MCDSBP is the market capitalization difference from the beginning of the reference period to the end of the reference period for the stock buyback portfolio. MCDAOP is the market capitalization difference from the beginning of the reference period to the end of the reference period for the portfolio of all other stocks. Values for MCDSBP represent the surviving companies in the data set that realized a decline in the number of common shares from the beginning to the end of the period, the CRSP[R] price adjustment factor was not missing, or, had a value of zero, are not Exchange traded funds or American Depository Receipts, and have a CRSP[R] "share code" of 10 or 11. N associated with the stock buyback portfolio (SBP) is the number of companies that had no stock splits, stock dividends, spin-offs or rights offerings (as defined in the CRSP[R] database) during the period. The t-statistic is a result of a two-tailed t-test for the mean difference of MCDSBP and MCDAOP. FEOV is the Folded F-statistic for equality of variances.

6. Conclusion

Given the empirical evidence, stock buybacks have a short-term impact on shareholder wealth (at the announcement of a stock buyback) but this short-term influence is questionable over longer time horizons. This study focuses on shareholder wealth changes for three, five-year and three, ten-year reference periods. The evidence shows market capitalization declines for most of the reference periods for the stock buyback portfolio relative to the portfolio of all other stocks. Whether the market capitalization changes are a result of the leverage influence of the stock buyback, or, the accretion to Earnings Per Share of the stock buyback, is a question for further research. Clearly, longer term performance results of stock buybacks remain a question of interest and additional exploration, particularly given the proliferation and size of this activity.

TERRILL KEASLER

keaslertr@appstate.edu

Department of Finance, Banking, & Insurance, Appalachian State University, Boone, NC

ROBIN T. BYERLY

byerlyrt@appstate.edu

Department of Management, Appalachian State University, Boone, NC

Received 24 July 2014 * Received in revised form 21 October 2014

Accepted 2 July 2015 * Available online 15 December 2015

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Table 1 Market Model Abnormal Returns

Event       N     Mean     PWCAAR    Positive-
Window            CAAR               Negative

(0, 0)      91    1.32%    0.97%     58:33
(0 ,+1)     91    2.18%    1.48%     66:25
(0, +10)    91    3.13%    2.07%     59:32

Event       Patell Z     Generalized
Window                   Sign Z

(0, 0)      6.717 ***    2.726 **
(0 ,+1)     7.241 ***    4.403 ***
(0, +10)    4.329 ***    2.935 **

Significant at .01 **

Significant at .001 ***

Data are calculated (or Derived) based on data
from CRSP 1925 US Stock Annual
[C]2012 Center for Research in Security Prices (CRSP[R])
at the University of Chicago Booth School of Business.

Table 2 Descriptive Statistics

              Five Year Reference Period

              2006-2010     2007-2011     2008-2012

Panel A       Market Capitalization for
              Companies with Stock Buybacks

Quartile 1    82617.6       7935.65       88140.0

Median        561746.1      564706.       651495.0

Quartile 3    2958616.9     2943900.0     3518200.0

Panel B       Market Capitalization All Companies
              (excluding Companies doing Stock Buybacks)

              2006-2010     2007-2011     2008-2012

Quartile 1    36958.4       29759.4       37684.5

Median        226586.0      192170.0      242899.0

Quartile 3    1004800.0     916621.0      1113180.0

              2006-2010     2007-2011     2008-2012

Panel C       Share Change for Companies
              with Stock Buybacks

Quartile 1    -13770        -68050.0      -15000.0

Median        -2900         -2926.0       -2700.0

Quartile 3    -669          -139.1        -640.0

              Ten Year Reference Period

              2001-2010     2002-2011     2003-2012

Panel A

Quartile 1    2167407       26065.0       43470.0

Median        131525.0      181661.0      315698.0

Quartile 3    1480610.0     1740320.0     2486490.0

Panel B

              2001-2010     2002-2011     2003-2012

Quartile 1    10225.2       13548.2       17767.4

Median        119593.0      126962.0      173927.0

Quartile 3    763723.0      776235.0      1002620.0

              2001-2010     2002-2011     2003-2012

Panel C       Share Change for Companies
              with Stock Buybacks

Quartile 1    -11000.0      -16000.0      -18000.0

Median        -1900.0       -2500.0       -3000.0

Quartile 3    -370.0        -420.0        -600.0

Data are calculated (or Derived) based on data from
CRSP 1925 US Stock Annual
[C]2012 Center for Research in Security Prices (CRSP[R])
at the University of Chicago Booth School of Business.

Table 3 All Stocks - t-test for mean difference in
beginning and ending market capitalization

              Five Year Reference Period

           2006-       2007-        2008-
           2010        2011         2012

MCDSBP     -42303      -1225032     -867918

MCDAOP     298770      24281.1      341320

N - SBP    1079        1160         1059

N - AOP    3187        3014         2979

T          -2.90 **    -4.00 ***    -4.16 ***

FEOV       1.22 **     1.49 ***     1.43 ***

               Ten Year Reference Period

           2001-        2002-        2003-
           2010         2011         2012

MCDSBP     -876307      -757404      862969

MCDAOP     594571       598461       1291490

N - SBP    907          851          821

N - AOP    4218         3869         3610

T          -5.07 ***    -4.21 ***    -1.03

FEOV       1.17 **      2.94 ***     1.09

Significant at .10 *

Significant at .01 **

Significant at .001 ***

Data are calculated (or Derived) based on data from CRSP
1925 US Stock Annual [C]2012 Center for Research in Security
Prices (CRSP[R]) at the University of Chicago Booth
School of Business.

Table 4 Large and Small Capitalization Stocks t- test for
mean difference in beginning and ending market capitalization

               Five Year Reference Period

           2006-        2007-        2008-
           2010         2011         2012

Panel A Large Capitalization

MCDSBP     -538423      -1795517     -1300503
MCDAOP     -1400903     253035       849805
N - SBP    641          716          640
N - AOP    1471         1406         1422
t          -3.01 *      -3.55 ***    -4.03 ***
FEOV       1.57         1.11         1.11

Panel B Small Capitalization

MCDSBP     -254159      -305060      -176194
MCDAOP     -184456      -175736      -123077
N - SBP    438          444          419
N - AOP    1716         1608         1557
t          -0.69        -1.64        -1.03
FEOV       1.44 ***     3.85 ***     1.59 ***

               Ten Year Reference Period

           2001-        2002-        2003-
           2010         2011         2012

Panel A Large Capitalization

MCDSBP     -1770331     -1385768     1852044
MCDAOP     1643257      1576095      3023930
N - SBP    390          418          434
N - AOP    1710         1636         1599
t          -4.97 ***    -4.21 ***    -1.38
FEOV       1.07         2.56 ***     1.32 ***

Panel B Small Capitalization

MCDSBP     -201899      -150809      -246227
MCDAOP     -120442      -117799      -86018.9
N - SBP    517          433          387
N - AOP    2508         2233         2011
t          -1.59        -1.18        -2.95 **
FEOV       8.58 ***     1.17 *       26.43 ***

Significant at .05 *

Significant at .01 **

Significant at .001 ***

Data are calculated (or Derived) based on data from CRSP
1925 US Stock Annual [C]2012 Center for Research in Security
Prices (CRSP[R]) at the University of Chicago Booth
School of Business.
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Author:Keasler, Terrill; Byerly, Robin T.
Publication:Economics, Management, and Financial Markets
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Geographic Code:1USA
Date:Dec 1, 2015
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