Abstract
This study examines the extent of firm-specific and industry-level information conveyed in open-market stock repurchases announced by REITs. We measure information revealed in open-market stock repurchase announcements using stock return and decompose the stock return into firm-specific, industry-wide, and market components. We find that the announcement period return is mainly attributed to the firm-specific component. However, long-term returns following the announcement are largely due to the industry return components. We also find that changes in profitability are not related to the announcement abnormal return. Our results suggest that the repurchase signal is about the intrinsic value of a REIT rather than the REIT’s future prospect. Moreover, the repurchase signal is fully incorporated into the pricing process at the announcement.
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Notes
In addition to signaling, the literature provides that firms are motivated to repurchase shares to distribute excess cash to shareholders, to adjust capital structure, to support management and employee stock option exercise, to substitute dividends, among others.
According to the data available on the NAREIT website, equity, mortgage, and hybrid REITs account for 91.5%, 8.2%, and 0.3%, respectively, in terms of market capitalization in 2009.
The non-repurchasing REIT industry portfolio is a value-weighted REIT portfolio that excludes repurchasing REIT j from the portfolio. Consequently, the composition of the REIT industry portfolio is different for different repurchasing REIT j.
Since share repurchases are usually conditioning on stock undervaluation prior to the announcement, beta estimate using return data right before repurchases likely will be biased. Accordingly, we use the data from day −255 to day −129 to estimate beta.
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Huang, GC., Liano, K. & Pan, MS. Do open-market stock repurchases convey firm-specific or industry-wide information? Evidence from REITs. J Econ Finan 43, 382–397 (2019). https://doi.org/10.1007/s12197-018-9463-9
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DOI: https://doi.org/10.1007/s12197-018-9463-9