Story Buybacks Yield Substantial Return on Investments

first_imgAddThis Share Contact: Winston Derden Phone: (713) 831-4793 Stock Buybacks Yield Substantial Return on InvestmentsDocumenting a strong trend in current trading on Wall Street, research by a Rice business professor indicates that corporate stock repurchases may be the key to investment returnsthat are significantly higher than the market average. A recent study by David Ikenberry, an assistant professor in the Jesse H. Jones Graduate School of Administration, said investments in firms reacquiring their own stock on the open market can reward investors with returns of as much as 45 percent above average marketperformance over a four-year period.”What is significant in this research,” Ikenberry said, “is that the market is surprisingly slow to respond to the announcement of many stock buybacks. Because of this substantial delay in the market response, there is a significant time for investors to buy undervalued stocks that will tend to an increase in value over the next four years.” Ikenberry’s research is presented in a working paper entitled”Market Underreaction to Open Market Share Repurchases.” The workingpaper was produced in collaboration with Josef Lakonishok of theUniversity of Illinois at Urbana–Champaign and Theo Vermaelen ofINSEAD, a French business institute. One surprising finding of the research is that a buyback can be a positive signal about a company, but it is not immediately seen that way in the market. For example, Ikenberry said his research shows that an average response to the announcement of an open market stock repurchase only increases the price of the stock by 3.5 percent. However, over a four-year period, investors who bought and held stock that had been announced for repurchase realized gains on average of more than 12 percent above the gains of stocks in a control portfolio. For value stocks, the average gain was more than 45 percent over four years. The research is based on an extensive sample of 1,239 firms that announced between 1980 and 1990 that they would repurchase their own stock on the open market. All the companies in the sample are traded on the New York Stock Exchange (NYSE), the American Stock Exchange (ASE) or the NASDAQ exchange. Currently, dollar volume in stock buybacks is outpacing investments in initial public offerings (IPOs) by approximately three to one. Projections for 1994 indicate that stock buybacks could reach $50 billion, the second highest total in a decade. Some major companies that have announced stock buybacks recently are NationsBank, Bank One, Merrill Lynch, Pfizer and Cray Research. At the beginning of the month, Philip Morris announced a massive $6 billion repurchase of its shares. Ikenberry can be reached at his Rice office at 285-5385. Copies of the working paper “Market Underreaction to Open Market Share Repurchases” is available by writing David Ikenberry at the Jesse H. Jones Graduate School of Administration, Rice University, P.O. Box 1892, Houston, Texas 77251. Rice University is an independent, coeducational, nonsectarian private university dedicated to undergraduate teaching and graduate studies, research and professional training in selected disciplines. It has an undergraduate population of 2,674, a graduate and professional student population of 1,449, and a full-time faculty of 437. ###last_img

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