The Information Content of Share Repurchase Programs

Contrary to the implications of many payout theories, we find that announcements of open-market share repurchase programs are not followed by an increase in operating performance. However, we find that the systematic risk and the cost of capital of these firms decline after these events. Further, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Taken together, our results suggest that the market reacts positively to share repurchase announcements because these events are associated with a reduction in the agency costs of free cash flows and with a reduction in the firm's cost of capital. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in systematic risk