But phantom repurchase programs are rare, and most are rooted in sound economic motives that generally pay off for both companies and investors, said David Ikenberry, a University of Illinois finance professor and researcher for the study.
“The good news is that the vast majority of repurchase programs are solid and well intentioned,” he said. “But there appear to be a handful where companies are indeed trying to mislead the market. They’re down on their luck and hoping a repurchase announcement will spark a price reaction that might not be warranted.”
Among other reasons, firms routinely launch buybacks when they perceive that shares are undervalued, said Ikenberry, whose study will appear in the Journal of Corporate Finance. Buybacks can provide a competitive return by reducing publicly held stock, boosting per-share earnings even if profits remain the same.
In those cases, announcements of repurchase plans are often greeted as a bullish signal, sparking bargain hunting by investors that drives up share prices, said Ikenberry, who has studied stock repurchase programs for 15 years.
But he says Wall Street analysts have long worried the positive market reaction could also spawn abuse, encouraging troubled firms to tout repurchase programs they have no intention of following through on.
“The concern has always been that there is no requirement that these buybacks ever be completed,” Ikenberry said. “So you have this potential for cheap talk and empty promises by firms who are down on their luck and just looking for a quick fix.”
He says those suspicions are supported by a study of more than 7,600 repurchase programs announced between 1980 and 2000, which found that firms showing signs of financial distress are less likely to follow through on buybacks.
Firms that used aggressive accounting accruals to pad earnings but still saw stock prices decline repurchased fewer shares than healthy companies, according to the study, co-written by business professors Konan Chan, of the University of Hong Kong, Immoo Lee, of the National University of Singapore, and Yanzhi Wang, of Yuan Ze University.
“This paints a picture of companies that are struggling and their stock prices are falling even though they’re doing everything they can to pump up earnings,” Ikenberry said. “Announcing a share repurchase may be just one more public relations tool in their effort to turn the tide.”
He says the study is the first empirical review of repurchase programs that have the potential to be misleading, and was sparked by long-standing concerns among analysts, scholars and observers such as Jim Cramer of CNBC’s “Mad Money.”
“By definition, there can be no smoking gun with the tools we have,” Ikenberry said. “Yet we do have compelling circumstantial evidence, and find a limited number of cases where it’s plausible that some misleading behavior on the part of management did occur.”
Investors can guard against buying into phantom repurchase programs through due diligence, he said. Warning signs include strong earnings despite weak cash flow, indicating aggressive accounting practices, coupled with a long-term pattern of languishing stock value.
But Ikenberry says the study shows that deceptive repurchase programs are the exception not the rule, and cause no long-term harm to the market. While stock prices often surge with the repurchase announcement, they soon dip if earnings fail to support the increase.
He compares the market’s rise and fall to long lines that follow hype for a new restaurant. “If the food turns out to be good, business will stick and there will be lines for a long time,” Ikenberry said. “But if it’s not good food, the hype and buzz will fade and business will, too.”
Jan Dennis | EurekAlert!
Rutgers-led innovation could spur faster, cheaper, nano-based manufacturing
14.02.2018 | Rutgers University
New study from the University of Halle: How climate change alters plant growth
12.01.2018 | Martin-Luther-Universität Halle-Wittenberg
Satellites in near-Earth orbit are at risk due to the steady increase in space debris. But their mission in the areas of telecommunications, navigation or weather forecasts is essential for society. Fraunhofer FHR therefore develops radar-based systems which allow the detection, tracking and cataloging of even the smallest particles of debris. Satellite operators who have access to our data are in a better position to plan evasive maneuvers and prevent destructive collisions. From April, 25-29 2018, Fraunhofer FHR and its partners will exhibit the complementary radar systems TIRA and GESTRA as well as the latest radar techniques for space observation across three stands at the ILA Berlin.
The "traffic situation" in space is very tense: the Earth is currently being orbited not only by countless satellites but also by a large volume of space...
An international team of researchers has discovered a new anti-cancer protein. The protein, called LHPP, prevents the uncontrolled proliferation of cancer cells in the liver. The researchers led by Prof. Michael N. Hall from the Biozentrum, University of Basel, report in “Nature” that LHPP can also serve as a biomarker for the diagnosis and prognosis of liver cancer.
The incidence of liver cancer, also known as hepatocellular carcinoma, is steadily increasing. In the last twenty years, the number of cases has almost doubled...
In just a few weeks from now, the Chinese space station Tiangong-1 will re-enter the Earth's atmosphere where it will to a large extent burn up. It is possible that some debris will reach the Earth's surface. Tiangong-1 is orbiting the Earth uncontrolled at a speed of approx. 29,000 km/h.Currently the prognosis relating to the time of impact currently lies within a window of several days. The scientists at Fraunhofer FHR have already been monitoring Tiangong-1 for a number of weeks with their TIRA system, one of the most powerful space observation radars in the world, with a view to supporting the German Space Situational Awareness Center and the ESA with their re-entry forecasts.
Following the loss of radio contact with Tiangong-1 in 2016 and due to the low orbital height, it is now inevitable that the Chinese space station will...
Fraunhofer Institute for Organic Electronics, Electron Beam and Plasma Technology FEP, provider of research and development services for OLED lighting solutions, announces the founding of the “OLED Licht Forum” and presents latest OLED design and lighting solutions during light+building, from March 18th – 23rd, 2018 in Frankfurt a.M./Germany, at booth no. F91 in Hall 4.0.
They are united in their passion for OLED (organic light emitting diodes) lighting with all of its unique facets and application possibilities. Thus experts in...
A new scenario seeking to explain how Mars' putative oceans came and went over the last 4 billion years implies that the oceans formed several hundred million...
23.03.2018 | Event News
19.03.2018 | Event News
16.03.2018 | Event News
23.03.2018 | Materials Sciences
23.03.2018 | Agricultural and Forestry Science
23.03.2018 | Physics and Astronomy