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Market underreaction to open market share repurchases

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Although firms repurchase chares on the open market for a variety of reasons, undervaluation is one of the most frequently mentioned motives. Yet surprisingly, the average market reaction to the news of a chare repurchase is only 3.5 percent. In this paper, we examine the long-run performance of 1,239 open market share repurchases announced during the period 1980 to 1990. Using carefully constructed benchmarks, we find that the average excess four-year buy-and-hold return after the announcement is 12.6 percent. For "value" stocks, companies that are more likely to be making repurchases because of valuation reasons, the average excess return is 45 percent. Thus undervaluation does indeed appear to be an important motive. Furthermore, it also appears that the market errs in its initial response and ignores much of the signal conveyed by this type of repurchase announcement

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