Stock buybacks are often, but not always, an indication that stock price is at a relative low. Are there ways to filter out “not always” cases? In their May 2009 paper entitled “Insider Ownership, Institutional Ownership, and the Timing of Open Market Stock Repurchases”, Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael Simkovic test whether open market repurchases occur at relatively low prices and whether a firm’s ability to time repurchases relates to levels of insider and institutional ownership. This study exploits a recent SEC requirement, effective at the end of 2003, that publicly held firms disclose monthly stock buyback volumes and prices in quarterly filings. Using this monthly buyback volume and price data for the period February 2004 through July 2006, they conclude that:
- There is strong evidence that firms successfully time buybacks on average such that:
- Repurchase volume in the current month relates negatively (positively) to market-adjusted returns in the previous (subsequent) months.
- Periods preceding (following) months with repurchase activity tend to have negative (positive) abnormal (risk-adjusted) returns.
- The average price paid for repurchases is 0.62% below the average comparable closing price such that the average total cost of a firm’s repurchases is significantly below benchmark total costs.
- As insider ownership increases, a firm’s ability to time repurchases decreases.
- Level of institutional ownership relates positively (negatively) to a firm’s ability to time repurchases at low (high) levels of institutional ownership.
- Results suggest that timing of repurchases becomes more difficult as the fraction of informed ownership increases.
In summary, evidence suggests that investors may be able to enhance stock buyback signaling by focusing on firms with relatively low insider ownership.
