The information content of Canadian open market repurchase announcements

Purpose – This study seeks to examine the role of firm characteristics and insider private information in affecting Canadian firms’ repurchase decision and the associated announcement period stock return. Design/methodology/approach - Past studies of announcement returns employ a standard event-study methodology, which produces biased parameter estimates when the corporate event is voluntary. This study employs the conditional event study methodology, which is free of self-selection bias. The conditional model also provides a direct test of whether private information is conveyed through the announcement. Findings - It is found that firms are more likely to buy back shares if they have greater free cash flows, lower market-to-book ratios, poor prior stock performance, and their insiders have large shareholdings. It is shown that the announcement period returns are strongly and positively related to the private information possessed by company insiders. The market reacts to the reason given for the repurchase and reacts less positively to repeat repurchases. Overall, the evidence is consistent with Isagawa's model which argues that repurchases signal that the insiders are not the type to waste their free cash flow. Research limitations/implications - This methodology should also be applied to US open market repurchases. Originality/value -This is the first study to: explicitly test whether the abnormal return is attributable to private information; employ the conditional event study methodology in examining the announcement return; and study the returns to Canadian repurchase announcements.