Do Share Buy Back Announcements Convey Firm Specific or Industry -wide Information? A Test of the Undervaluation Hypothesis

In this paper, we examine the information content (firm specific) and information transfer (other firm) effects of share buy back announcements using a unique Australian data where the stated reason for the buy back is undervaluation of the firm's stock price. Consistent with the US studies, we find that such share buy back announcements signal positive information about the announcers and their rivals, suggesting that both the announcing firms and their industry rivals were previously undervalued by the market. The results show that while shareholders of firms announcing share buy backs that are motivated by undervaluation of the share price earned statistically significant abnormal returns of 1.25% on the announcement day, the shareholders of rival firms earned significant abnormal returns of 0.39% on day +2. The market reaction of industry counterparts thus appears to occur with a lag. For the three days surrounding the announcement, announcing firms' shareholders earned a statistically significant abnormal return of 4.30%, while rival firms' shareholders earned abnormal returns of 1.39%. Consistent with our conjecture, we find that the magnitude of the abnormal returns of the share repurchases that are motivated by undervaluation of shares are larger than have been documented for these US market where managers are not legally required to disclose the motives for the share repurchase. We also examine whether the first share buy back announcement in the industry or in a buy back program conveys more information than subsequent announcements but we do not find any significant results. The degree of similarity in cash flow and investment opportunities between the repurchasing firms and their industry counterparts, and the degree of competition within the industry significantly explain the variation in the observed industry (information transfer) effects.