The buyback anomaly and the motives behind share repurchase announcements in Norway

Abstract

Firms announcing a repurchase of their shares often experience a period of abnormal returns; this is known as the buyback anomaly. The buyback anomaly is a persistent market anomaly that is challenging to explain (Andreou et al., 2018). Researchers like Ikenberry et al. (1995) and Peyer and Vermaelen (2009) found positive long-run abnormal returns for firms in the 48 months following share repurchase announcements. This thesis is twofold. First, we investigate if Norwegian firms listed on Oslo Stock Exchange (OSE) from 2000-2019 experience abnormal returns following a share repurchase announcement. We employ a cross-sectional regression model using the three-factor model by Fama and French (1993) with the additional momentum factor (Carhart, 1997). We found long-term abnormal returns in the four years following the repurchase announcements. Our results suggest that Norwegian firms use share repurchase announcements to signal undervaluation to the market, and that the market is underreacting to the undervaluation signal. The underreaction might be rational, as several researchers claim that a repurchase announcement is a weak signal as it does not impose any cost for the firm. Second, we investigate what motivates these firms to announce share repurchases. To examine the motives behind announcing share repurchases, we test the capital structure adjustment hypothesis, the substitution of cash dividends hypothesis, the excess cash distribution hypothesis and the signalling hypothesis. Our empirical findings suggest that Norwegian firms announce share repurchases to signal the market, to distribute excess cash, or to substitute cash dividends. However, it is important to note that to substitute cash dividends or to distribute excess cash, the firm would have to execute the repurchase after the announcement.