Market response and firms' operating performance surrounding actual share repurchases: evidence from Hong Kong

Abstract

Share repurchases have become a popular payout method to distribute cash flows to shareholders not only in the U.S. but also other countries. This study examines the firms’ share price and operating performance surrounding actual share repurchases and the motivations behind share repurchases in the Hong Kong stock market. The empirical results show that, on average, firms engage in share repurchases when their stocks are under-valued and repurchases are followed by abnormal positive returns. Among repurchases, the stock price performance varies across firms’ size and market-to-book ratios. The market responds most favourably to repurchases that are made by small and value firms. This suggests that smaller firms are usually less analysed and more likely to be undervalued, hence the market reacts more favourably when they repurchase.