A Reexamination of Market Reaction to U.S. Bank Holding Company Share Repurchase Announcements
Date Issued
2008
Date
2008
Author(s)
Lee, Mei-Ying
Abstract
This paper examines the short-run market reaction to the U.S. bank holding company share repurchase announcements by using the event study methodology and conducts further regression analysis. In previous literatures, there are several motives which may affect the repurchase announcement: to substitute dividends; to signal the undervaluation of the bank’s stock; to deter the takeover threat; to adjust capital structures and to payout excess free cash flows. This study further analyzes three new hypotheses: the business cycle, the accounting loan default variables and loan composition. From the empirical result, we find that the announcement period returns are negatively related to the prior period returns, size and market-to-book ratio, but are positively related to first tier and total capital ratios. Taken together, the empirical result support many of our hypotheses and it highly supports the undervaluation signaling effect. However, it does not support the free cash flow hypothesis and takeover deterrence hypothesis. Our sample includes repurchase announcements between 1994 and 2006.
Subjects
Bank holding company
Stock repurchase
Event study
Cumulative abnormal returns
Capital adequacy ratio
Free cash flow
Takeover
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