Informed Traders:

Linking legal insider trading and share repurchases*

Konan Chan

University of Hong Kong

David L. Ikenberry

University of Colorado Boulder

Inmoo Lee

Korea Advanced Institute of Science and Technology

Yanzhi (Andrew) Wang

Yuan Ze University

August 2011

(Financial Analysts Journal, forthcoming)

* Chan is at the School of Economics and Finance, University of Hong Kong, Pokfulam Road, Hong Kong (Phone: +852-2241-5346 and e-mail: konan@business.hku.hk); Ikenberry is at the Leeds School of Business, University of Colorado Boulder, Boulder, Colorado 80309 (Phone: (303) 492-1809 and e-mail: david.ikenberry@colorado.edu; Lee is at KAIST Business School, 85 Hoegiro, Dongdaemun-gu, Seoul, 130-722, Korea (Phone: +82-2-958-3441 and email: inmool@kaist.ac.kr); and Wang is at the College of Management, Yuan Ze University, Jung-Li 320, Taiwan (Phone: +886-3-4638800 ext 2676 and e-mail: yeanjyh@saturn.yzu.edu.tw).

Informed Traders:

Linking legal insider trading and share repurchases

Abstract Logic suggests that a link might exist between insider trades and share repurchases for their potential to signal mispricing when market prices deviate from fair value; both events emanate from essentially the same set of decision makers. Using the overall repurchase sample, adding insider trading information is generally not helpful. However for “value” buyback firms where perceived mispricing may be a more important factor, insider buying activity provides a strong complement to the repurchase signal.

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Firms repurchase stock for a variety of reasons, nearly all of which are consistent in spirit with

enhancing shareholder value. Dittmar (2000) and Chan, Ikenberry, and Lee (2004) along with many other

papers document these various economic motivations and report evidence consistent with the idea that

such transactions, on average, benefit the company. Among these various motives, undervaluation is often

mentioned as a key factor. For example, in surveys of managers, mispricing is repeatedly identified as an

important motivation and repurchases are considered to be a mechanism to enhance shareholder value

when they perceive their stock as trading below fair value (Brav, Graham, Harvey, and Michaely

(2005)).1

Consistent with this view, several studies document positive long-term abnormal returns

subsequent to a share repurchase announcement (e.g., Ikenberry, Lakonishok, and Vermaelen (1995 and

2000) and Chan, Ikenberry, and Lee (2004)). These findings are not only observed for repurchases in

general, but are particularly strong in “value” cases where undervaluation would seemingly be most

prevalent. Disagreement, though, exists as to the extent to which these announcements in whole or in part

relate to inefficient pricing and also whether repurchases truly benefit shareholders in the long run.2

Moreover, some papers conclude that some buybacks are not motivated by mispricing as they identify,

ex-ante, subsets of buyback cases that do not seem to exhibit a post-announcement return drift, a result

contrary to the general finding.

Yet if we return to the premise cited so frequently that undervaluation is a driving force behind at

least some repurchases, a related question is whether insiders on occasion legitimately utilize this same

mispricing information for their own personal trading. Previous papers (e.g., Jaffe (1974), Seyhun (1986),

Rozeff and Zaman (1988), Seyhun (1988), Lakonishok and Lee (2001) and Griffin, Lont, and McClune

1 Brav et. al (2005) report that over 80% of corporations initiate stock repurchase programs when their stock is “a good value relative to other investments.” See also Vermaelen (1981), Dann (1981), and Comment and Jarrell (1991) for earlier work on information signaling. 2 For example, Grullon and Michaely (2004) argue that repurchasing firms are, in fact, slowly maturing in a manner that is driving their cost of capital gradually downward, thus escalating share prices and falsely giving the appearance of an ex-post return drift. Fama (1998) raises a different argument, questioning the extent to which the information signals in repurchase announcements are material once trading costs are considered. Moreover, some papers argue that at least some managers appear to use repurchases in a misleading way by taking advantage of the flexibility of buyback programs to repurchase no stock whatsoever (e.g., Chan, Ikenberry, Lee, and Wang (2010)).

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(2011)) find evidence that insider trading is indeed informative and that managers indeed possess timing

ability.

Given that the same decision makers serve at the core of both types of transactions, it seems

logical then to ask if the post-announcement return drift to repurchases is related in any way to the

presence (or absence) of sympathetic trades made by insiders. Is it the case that the timing considerations

in one transaction are related in some manner to those in a seemingly similar transaction made by the

same set of decision makers? Moreover, is there any evidence to suggest that combining the signal from

a buyback announcement with concurrent insider trading information might be meaningful or useful to

investors in real-time?

The key innovation of this paper is straightforward; to integrate real-time information about

insider trading activity with information about firms announcing concurrent repurchase programs to see if

the power of the repurchase signal is strengthened with this additional piece of potentially timing-related

information. We do this by evaluating the return performance of an implementable trading strategy based

only on publicly available information. Further, we consider analysis based on value-weighted investment

strategies which are seemingly more appealing to the professional investment community given that in

relative terms these portfolios have reasonably higher capacity for assets under management and do not

rely on smaller, less liquid stocks. Additionally, with this emphasis the implied direct and indirect trading

costs are also seemingly appealing.

We form a comprehensive sample of 9,976 U.S. open market repurchase cases announced from

January 1990 to November 2010, and examine whether a simple trading strategy based on both share

repurchase announcements and insider trading reports outperforms one exclusively focusing on buybacks.

Starting with the overall repurchase sample, we find, as shown in many other studies, significant long-

term stock return drifts after share buyback announcements, suggesting that our sample behaves similarly

to the repurchase samples used in prior studies, even though we have added more recent cases.

When we consider the marginal effect of adding insider trading information, the resulting return

drift patterns differ for growth versus value buyback firms. For growth firms where one might argue that

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undervaluation is less likely to be motivating a repurchase, the addition of insider trading information is

not particularly useful at the margin.3 For value firms where the propensity for undervaluation as a group

is seemingly higher, the addition of insider information leads to more impressive results. Here, insider

trading behaviors do appear to add information at the margin. For value buyback companies where

insiders concurrently show an abnormally elevated history of being net buyers, the size-and-book-to-

market benchmark-adjusted abnormal return is 44 basis points per month in the first post-announcement

year, more than double what is observed otherwise. When estimated using a Fama-French three-factor

model, the post-announcement drift for this group is 49 basis points per month (or almost 6% on an

annualized basis).

Using conventional performance measures such as Sharpe, Treynor and Information Ratios, the

marginal risk-adjusted return contributed by adding insider trading information is remarkable, but is again

limited to value-buyback cases. Similarly, support for the undervaluation hypothesis is also strong for

stocks with low analyst coverage where the potential for information asymmetry and mispricing is also

seemingly high and where the information of sympathetic insider trades would intuitively be valuable to

outside investors.

Some buyback transactions, of course, will not be driven by mispricing but rather by some other

corporate financing behavior or factor. Our evidence, though, suggests that a clear sub-set of cases does

appear to be motivated by mispricing and that investors can utilize insider trading information to identify

cases that have a greater propensity to be driven by undervaluation. By linking two separate academic

literatures on share repurchases and insider trading, we provide further insight into the debate questioning

the economic motivation behind share repurchase announcements and managerial timing ability.

The remainder of the paper is organized as follows. Section I describes the data and the methods

3 Although one expects greater informational asymmetry among growth firms compared to value cases due to their shorter history and higher level of intangible assets, growth firms are less likely to be undervalued since their trailing stock returns and price multiples (attributes which are often used to define growth) are comparatively high. While undervaluation in growth stocks, of course, may be present in any particular case, the propensity for undervaluation to motivate a repurchase program among growth stocks is plausibly lower, compared to the propensity among value stocks.

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used in the paper. Section II presents information on insider trading around share repurchase

announcements. Section III describes the empirical results and Section IV provides some concluding

remarks.

I. Data and Methods

A. Data

We obtain our sample from open market repurchase announcements recorded at Securities Data

Corporation over the period, January 1990 to November 2010. To reduce both the potential problem of

bid-ask bounce when evaluating monthly returns as well as the problem of skewness when evaluating

long-horizon returns (Conrad and Kaul (1993) and Loughran and Ritter (1996)), we eliminate cases where

the share price at the time of repurchase announcement is below $3. This leaves us with 9,976 cases over

the full sample period.

For insider trading information, the complete record is obtained from the Securities and Exchange

Commission’s Ownership Reporting System data files provided by Thomson Reuters. We define

“insiders” as directors and officers and include trades made both on the open market and through private

transactions. We also consider whether insider sales are associated with the exercise of stock options as

previous research suggests that insiders often sell shares immediately around these events (e.g., Ofek and

Yermack (2000)). To focus on economically significant transactions, we exclude insider transactions

involving less than 100 shares. A critical design element in this study relates to the timing of insider

trades and the exact date this information becomes public. We take care to form portfolios after the actual

reporting date (rather than transaction date) to ensure that the analysis reported here reflects an

implementable strategy.

B. Methods

We measure long-term stock performance using two different methods. First, we employ an

event-time approach and report abnormal stock returns assuming a holding period of four years following

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a buyback announcement.4 Here, abnormal stock returns are measured relative to a group of control firms

formed on the basis of market-cap and book-to-market equity ratio (B/M). Five non-repurchasing firms

which have similar market-cap and B/M and which are also listed on the same stock exchange are

matched as control firms for each repurchasing firm. Abnormal returns for a given buyback firm are then

calculated relative to its respective custom benchmark.5 These results imply equal-weighting. To identify

abnormal insider trading activity, we use the same set of control firms formed on the basis of market-cap

and B/M as those used to measure abnormal returns. This is important as previous studies show that the

tendency for insiders to trade is related to firm characteristics such as size and B/M.6

As a second basic method, we form value-weighted, calendar-time portfolios and evaluate their

performance using both a traditional academic approach and several performance measures widely

considered in the money management community. These portfolios assume a shorter, 12-month

investment horizon so that we focus more narrowly on return performance relating to the information

signals we are considering (repurchases and insider trades). This reduces confounding effects caused by

other information events that inevitably arise with a longer holding period. To implement this, each

month during our sample period we form a value-weighted portfolio composed of firms which announced

a buyback during the year prior to that month.7 Value-weighting in this context is appealing in that it

reduces the level of implied turnover simply due to monthly price volatility. Of course, each monthly

portfolio is also less prone to rely on smaller, less liquid firms. The resulting monthly return series is

4 For this part of the analysis, we limit the sample to repurchase cases announced through December 2006 so that we have complete return data (without truncation) to measure four-year return performance subsequent to a buyback announcement, thus allowing us to compare our findings with previous papers. 5 This method was used in Lee (1997) to deal with potential problems of using benchmark portfolios in a long-term performance study. Out of 9,018 buyback announcements made during 1990 and 2006, 180 had less than five matching firms when the exchange requirement is imposed. In these cases, we used less than five firms in the control group to consistently impose the same criteria. Similar to the method used in Lee (1997) and Chan, Ikenberry, and Lee (2004), after forming size deciles in each month, we choose five firms with the closest B/M ratio among those that belong to the same size decile and that are listed in the same stock exchange as the corresponding sample firm. 6 Lakonishok and Lee (2001) find that insiders tend to increase their buy transactions following periods of relatively low return performance and sell more after high return periods, and that although insiders in smaller firms tend to trade less often, the ratio of buy to sell transactions is comparatively higher. 7 Our sample begins in 1990 and continues through November 2010. Given our 12-month holding period, our time-series portfolio therefore extends from January 1991 through December 2010.

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further convenient for it allows us to use measures of return performance common to the investment

community including the Sharpe, Treynor, and Information Ratios.

To consider the marginal impact of insider information, we classify our repurchasing sample into

two groups on the basis of insider trading activity known at the time of the announcement. We do this by

considering the net number of insider buy transactions relative to the number of sell trades during the six-

month period prior to a given buyback announcement. Those classified as “Net Buy” are firms where

insiders might be trading sympathetically with the firm’s decision to repurchase stock compared to “Non

Net.” 8 As a further refinement, we identify cases where at the time of the repurchase announcement the

number of insider purchases is at least three more than the number of insider sales during the prior six-

month period. We label these cases as “Intensive Buy” and classify the balance of the sample as “Non

Intensive.” Our decision to limit the definition of insider trading to transactions during the preceding six

months is important for two reasons. First, we want to limit our cases to those where insider trading

decisions were reasonably concurrent with the firm’s repurchase decision. A second reason relates to the

SEC “short-swing rule” essentially banning insiders from making short-term profits.9 While this six-

month window reduces the potential number of observable insider signals, the resulting measure of the

insider buys which are observed is less confounded with reversing trades by informed insiders. As a final

refinement, we do not consider option-related sales in our definition of Net Buy or Intensive Buy

transactions. Instead, we limit our focus to affirmative decisions to sell stock which are not, at least in part,

related to the arbitrary timing of option expirations.

II. Insider Trading around Share Repurchase Announcements

Table 1 reports summary statistics for our buyback sample.10 The average market capitalization

of the 9,976 buyback firms in our sample is $3.5 billion in 2010 purchasing power and the average B/M

8 Previous studies show that the number of insider transactions is more informative than the dollar amount of insider transactions (e.g., Lakonishok and Lee (2001)). 9 According to the Securities and Exchange Act of 1934 Section 16 (b), companies can recover any profits made by insiders’ round-trip transactions within six months. 10 To accommodate the problem of extreme skewness often observed in this type of data, we winsorize all variables at top and bottom 1% to avoid outliers adversely dominating the reported means.

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ratio is 0.71. The median size decile is 3, indicating that our sample tilts in the direction of smaller firms.

The median B/M quintile is 3, suggesting a generally even balance between growth and value firms.

Consistent with prior studies, buyback firms in our sample on average significantly underperform

their respective size-and-B/M-matched control firms by a remarkable -15.48% during the 12 months prior

to a buyback announcement. Upon the news of a repurchase announcement, the mean abnormal return is

1.83% measured over a 5-day period. While open market programs are by definition flexible, companies

on average are announcing plans to repurchase 6.53% of their share base.

Table 1 also reports that there were 1.3 buy transactions among insiders in our sample worth $0.3

million in 2010 purchasing power in the preceding six months. This compares to 1.41 sell trades during

the same window worth $3.4 million. Table 1 also clearly shows that the majority of insiders in our

sample firms are not placing any trades at all in the six months preceding the repurchase announcement.

When we partition the full sample into different insider trading groups, the general finding of both poor

trailing returns prior to a repurchase announcement and of positive buyback announcement returns also

holds across these various sub-samples too.

In Table 2, we take a more careful look at insider trading patterns surrounding repurchase

announcements.11 While we classify firms as “net buyers” or “intensive net buyers” using transactions

occurring in a window of six months prior to a given buyback announcement, here, we look more broadly

at insider trading patterns in the four years surrounding the announcement compared to their respective

matching control firms.

In Panel A, insider purchases for the overall sample are significantly more common in buyback

companies compared to non-buyback cases. For example, during the six-month interval prior to the

announcement, insiders in repurchase firms buy 20% more frequently for themselves compared to their

counterparts in non-announcing, matching firms. In fact, throughout the entire four-year period, the

11 In this table, the post-announcement insider trading results are partially incomplete toward the end of our sample period as our dataset ends in 2010. As a check to see if this affected our findings, we estimated the results using the repurchase sample only through 2006, the same time period used in Table 3. We find no impact; the results are qualitatively the same as those reported here.

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difference between these groups is significantly different from zero for each window we report.

Interestingly, insider selling is also significantly more common, both before and after a repurchase

announcement, even after controlling for option-related transactions.12 In sum, insiders in repurchasing

firms apparently are, for whatever reason, more active traders, both buying and selling on personal

account with greater frequency compared to non-announcing firms of similar size and similar value-

growth characteristics. 13 One possibility for this elevated activity may relate to a self-selection bias in

that our sample is drawn from firms whose officers may be more sensitive to mispricing and more willing

to act on their respective firm’s perceived valuation. It is also possible that the increased insider activity

we observe may be due to increased insider ownership around buyback announcements as pointed out in

Michel, Oded, and Shaked (2010) for accelerated share repurchases.

Looking at the overall sample, we do not see much evidence of insider trading patterns consistent

with an information- or signaling-based motivation for share repurchases. On the other hand, it is well

demonstrated that firms repurchase equity on the open market for a variety of reasons that reach well

beyond simple mispricing and/or information signaling. For example, in firms with high B/M ratios (or

value stocks where in many cases performance may have been poor for several years) undervaluation

would indeed seem to be a predominant factor. For low B/M ratio firms that announce a buyback (or

growth companies where returns preceding the announcement are typically high), other reasons such as

returning excess cash, recalibrating capital structure or providing an alternative to a taxable dividend

could be more predominant factors that do not necessarily signal mispricing.14

12 We classify a sell trade as option-related for a given insider if it occurs within six months after the option was exercised and the number of shares sold was less than or equal to the number of shares covered by the option. 13 This contrasts with Lee, Mikkelson, and Partch (1992) who do not find increased insider selling in firms which use the tender offer mechanism to repurchase stock. The differences here may be due to several reasons, one being a difference in time period studied and another relating to the benchmark used to measure abnormal trading activity. Another key difference may relate to the increased risk executives face of being accused of self-dealing if insiders sell shares around tender offers given their highly publicized nature and the big price movements surrounding these events. The same may not be true for open market repurchases as the circumstances are quite different. 14 This is not to suggest undervaluation is never a factor motivating some growth-stock buybacks. Managers in some low B/M firms may have insight into mispricing that is not or cannot yet be recognized in the marketplace, and thus initiate a share repurchase. On the other hand, it is also the case that low B/M firms have typically experienced favorable stock returns in the recent past. To the extent that this past market success translates into hubris (Roll (1986)), managers in these firms may mistakenly extrapolate this success into the future, implying a perceived

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To explore these issues, we examine insider trading patterns separately in Panels B and C for

growth and value firms. Insider buy transactions in the four years surrounding a repurchase

announcement occur with greater frequency both for value and for growth firms compared to their

corresponding matching firms. The reported point estimates of insider buy activity for value buyback

companies tend to be significantly higher than those for growth.15

When we turn attention to insider sales, results for the two sub-samples diverge. For growth

companies, we see very active insider selling activity surrounding a buyback announcement. Managers in

firms classified as growth stocks are more active sellers. Even after controlling for these growth

characteristics and the fact that managers in growth firms tend to be more active sellers, we still see

substantially elevated levels of insider selling activity. This result is not consistent with the pattern one

would anticipate if managers of growth firms viewed their stock as undervalued.

For value stock buyback companies, we do not see the same selling pattern. Insiders of value

buyback firms sell their shares significantly less frequently than insiders of matching benchmark firms

during the two years surrounding buyback announcements. This relative absence of insider selling by

value companies is our first clue that insider trading behaviors may be consistent with an information-

based motivation for some share repurchases.

III. Long-Run Stock Performance

A. Event-time monthly abnormal returns conditional on insider trading

Table 3 reports mean monthly abnormal returns of buyback sample firms overall and for different

insider trading groups relative to their corresponding matching firms. 16 In Panel A, for the overall sample,

we again see that repurchase companies suffer from remarkably poor performance in the 12 months prior

to a repurchase announcement. Consistent with what has been reported in many previous studies, we also

undervaluation that, ex-post, does not materialize. 15 Given this result and to conserve space, significance levels are omitted here. 16 While excluding low-priced stocks as we have done helps us to deal with the problem of bid-ask bounce, it does not fully eliminate the impact of skewness. To avoid the dominating effects of outliers, we report results in Tables 3, 4 and 5 after winsorizing returns at the top and bottom 1%. Returns lower (higher) than the 1st (99th) percentile are replaced with the 1st (99th) percentile return. This approach does not affect our conclusions yet it does allow the analysis to be more representative of overall sample performance.

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see that, following the announcement, abnormal performance reverses for these same firms, and that they

begin to significantly outperform their size-and-B/M adjusted matching firms. In the first year, the point

estimate is 26 basis points (bps) per month, followed by 36 bps in the second year and 26 bps in the third.

While other studies find a drift in the fourth post-announcement event year, the positive point estimate we

report here is not significant using traditional confidence intervals. Although not reported in Table 3, the

mean abnormal return over the entire four-year post-announcement period is 24 bps per month (or

approximately 11.5% over the entire four-year period) and is significant at traditional confidence intervals,

a result consistent with the prior literature on open market buybacks.

When we separately examine the performance of growth buyback firms, we continue to see some

evidence of positive post-announcement abnormal return drift, yet statistical significance of the drift is

limited to the first and third years. For value firms, Panel A shows that the drift is much more robust.

These results are consistent with the notion that managements’ motivation for this subset of buyback

cases may indeed differ from that of growth firms.

Next, we integrate insider trading information into our repurchase analysis. When we examine the

performance of different insider trading groups in Panels B to G in Table 3, we find some differences in

abnormal returns across insider trading groups for the overall sample and for value firms in particular.

Generally speaking, conditioning post-repurchase announcement performance on whether insiders were

Net Buys or Intensive Buys provides additional information at the margin.

For growth firms, though, neither the Net Buy nor Intensive Buy sub-set of cases shows evidence

of significantly outperforming their matching firms in any of the four post-event years. In fact, it is the

Non Net (and Non Intensive) growth firms which seem to be driving what little drift that we see in post-

announcement performance for growth stocks.

For value firms the results differ. Net Buy (Intensive Buy) value firms generate an abnormal

return of 44 (60) basis points per month in the first post-announcement year, significantly higher

abnormal returns than those earned by value firms with Non Net (Non Intensive). For Intensive Buy value

firms, while point estimates of excess performance are high, the sample size begins to drop quite a bit

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thus reducing the power of this test. Our point estimates of year-one abnormal performance do indeed

improve as one might expect if insider trading were providing additional information related to mispricing

at the margin.

In the next section, we examine the performance of monthly value-weighted buyback portfolios

formed in calendar-time based on prior insider trading behavior, an alternative perspective that is perhaps

more relevant to real-world investors.

B. Assessing the impact of insider trading behavior

Here, we estimate performance using a calendar-time technique many money managers might

appreciate. Our implicit strategy is that a repurchase firm enters the portfolio in the month following its

announcement and remains there for 12 months.17 The same is done for sub-portfolios conditioned on

how the firm’s insider trading was classified at the time of the buyback announcement. As before, these

portfolios are formed only from publicly available information known at the time of portfolio formation.

Here, we assume value-weighted portfolios so that our analysis is more consistent with how a real-world

investor might pragmatically expect to implement this strategy.

Table 4 presents return performance for various buyback portfolios using three common

performance metrics: the Sharpe, Treynor, and Information Ratios. For comparison, we also report

performance for naively formed style-based reference portfolios.18 In practice, there is no consensus on

which metric could or should dominate. Given this, we report all three metrics.

The average raw return for the overall buyback portfolio is 10.4%. By comparison, annualized

mean returns for various reference portfolios during that same period range from 10.0% using the large

17 This twelve month window is comparatively short but also reduces the influence of alternative news events, thus allowing us to focus on the information content of the repurchase decision. Out of 240 months during January 1991 and December 2010, there were seven months when buyback portfolios for Intensive Buy could not be formed since there were an insufficient number of buyback announcements. In those months, we assume the portfolio earns that month’s S&P 500 index return. 18 Here, all returns and performance metrics have been annualized. The Sharpe ratio measures the average excess return over standard deviation whereas the Treynor ratio is the same but measured relative to estimated systematic risk, or beta. The Information ratio measures the average return difference between a portfolio and a given benchmark relative to the standard deviation of the resulting return difference.

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benchmark to 17.2% for the small-value benchmark.19 The Sharpe ratio of buyback firms overall is 0.47

whereas the Treynor ratio is 0.08. Although not reported here, these values are respectively higher than

the same ratios of the large, growth and market reference benchmarks. Compared to small and value

portfolios, buyback firms in general earned higher excess returns per unit of both total and systematic risk

than non-value and non-small firms.

A key purpose of this paper is to consider the marginal impact of adding insider trading

information to that of buybacks in general. Adding Net Buy information to the overall sample is not

particularly helpful. This result changes only slightly if we focus on Intensive Buy cases. Here, we see

some evidence of greater return per unit of risk for both the Sharpe and Treynor ratios.

However for value firms, the distinction in performance becomes clearer. Both the Sharpe and

Treynor ratios for value firms classified as Net Buy or Intensive Buy are roughly three to four times

higher in scale compared to their respective non-net complements. The results seem to show clear

evidence that the additional information gained from insider trading is indeed useful in, ex-ante,

identifying additional excess performance.

Similarly, we report on the right side of Table 4 Information Ratios calculated with respect to

four different benchmark portfolios: small, value, small-value, and the overall market portfolio. Given

that we do not use a structured portfolio to match against a given benchmark, the absolute Information

Ratio is not of particular importance to us. However what is helpful is to look at comparisons between

sub-samples when insider trading information is added. As before when looking at the overall repurchase

sample, we find only mild evidence that insider trading adds informational power on a return per unit of

tracking error basis. Yet when we focus on value cases, Information Ratios dramatically increase across

all benchmarks for the Net Buy and Intensive Buy groups, indicating that concurrent insider trading

information is providing useful information at the margin to outside investors.

19 Here, comparisons with a given benchmark are arbitrary to some degree. Later, we specifically control for known risk factors. Here, though, we simply report comparisons to common benchmarks readily available from Ken French’s website using an approach that may resonate more with the money management community.

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As a final illustration of the power of adding insider trading information to the information in

repurchases, Figure 1 graphically presents cumulative monthly returns (in logarithmic scale) for the

market portfolio and also for various repurchasing portfolios starting from January 1991 and through

December 2010. The “Net Buy-Value” and especially “Intensive Buy-Value” portfolios are indeed

superior; suggesting that publicly available insider trading information seems to be useful for value

buyback firms. Consistent with the results we observed earlier, this same information is less helpful on

the margin for non-value cases.20

C. Robustness

In Table 5, we examine the abnormal performance of these same calendar-time portfolios using a

more conventional academic empirical design. Here, we report evidence using the Fama-French three-

factor model and the Carhart four-factor model to control for market, size, B/M, and momentum effects.

We report alphas from time-series regressions over the entire sample period and over three sub-periods to

check the robustness of these results over time. Similar to our previous findings, for the overall sample

when we condition on Net Buy, we do not see evidence of significant abnormal performance. For

Intensive Buy firms, the results strengthen slightly.

However, when we focus on value buyback firms where mispricing may be a greater motivating

factor, both Net Buy and Intensive Buy firms significantly outperform even after controlling for risk. The

monthly alpha for the three-factor model for the value Net Buy portfolio is 49 basis points, indicating an

annualized abnormal return of nearly 6%. For value Intensive Buy firms, the points estimates are more

than double in scale compared to those for value Net Buy firms. This performance is remarkably higher

than the abnormal return observed for Non Buy firms (-11 bps per month) or for Non Intensive firms (-20

bps per month). We also report evidence assuming a zero-investment strategy that is long in Buy

portfolios and short in Non Buy portfolios (i.e., the row labeled “Difference” in Table 5). Again, excess

20 One caveat to keep in mind in interpreting the results is that the "Intensive Buy-Value" group is composed of only 213 repurchases in total across our sample period (see Table 3, Panel E), which represents less than 2.1% of our total sample.

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performance for these zero investment portfolios is limited to value buyback cases.21

As a final check, we repeat the main analyses in Table 5 for two different groups based on the

number of financial analysts, a proxy for the degree of informational asymmetry. Since one might expect

insider trading information to be more useful when informational asymmetry is severe, we compare

alphas of zero-investment portfolios formed from Buy versus Non-Buy cases under different levels of

analyst coverage. In unreported results, we find that insider trading information is more useful among

those firms with low analyst coverage. The results are consistent with the premise that the marginal

signaling content of insider trading around buybacks is seemingly most useful for buyback cases

motivated by mispricing (compared to other reasons) and also where the potential for mispricing due to

factors such as neglect or informational asymmetry is greatest.

IV. Conclusions

Previous studies document superior return performance for firms which announce open market

share repurchases. One reason active money managers often pay attention to buyback firms is that a rich

literature suggests these announcements may be motivated by undervaluation. However, many question

these findings. For example, mispricing is arguably only one reason among many for why managers

repurchase stock and measuring long-horizon performance is difficult.

We try a new approach to shed light on this debate of the role of mispricing in motivating

buybacks by considering concurrent insider trading behavior, an event where previous papers also

conclude that managers have timing ability. At their core, the decision to invest for personal reasons due

to mispricing (insider trading) and the decision for the company to repurchase stock due to the same

reason share the same set of decision makers – the company’s senior management. Given that the typical

21 The results for the last sub-period 2005 and 2010 are poor, even for the Intensive Buy vs. Non Intensive cases. Clearly, this period of time was a very unusual period of market turmoil; this generally unanticipated economic event may account for the change compared to the two previous sub-periods. However one key factor we found driving these poor findings is the fact that many financial institutions became defined as “value” firms during the global financial crisis. Moreover, several insiders in these financial institutions, perhaps out of a desire to overtly signal support, became buyers. In retrospect, we know this increased density of financial institutions struggled during the prolonged global financial crisis thus affecting to at least some extent the returns we report here.

15

insider is “overexposed” in the company from a personal risk vantage point, insider purchases should

conceivably be a positive and informative signal to outside investors in cases where repurchases were

motivated by mispricing as opposed to other factors.

Consistent with this view, we find that considering insider trading behavior prior to the

announcement of a buyback case is useful but is limited to cases where, ex-ante, the propensity for

undervaluation reasonably exists. This includes buybacks announced by value companies and companies

less widely followed by financial analysts. In other cases where mispricing may be a subsidiary reason

compared to other motivating factors, adding insider trading information is not particularly useful. Given

that long-horizon return performance can be measured in a variety of ways, we draw our conclusions

based on several different approaches. We also consider performance metrics commonly used in practice.

Overall, our findings appear to be robust.

While this paper cannot completely assuage the skeptic, we provide confirming evidence that

mispricing due to market undervaluation is indeed a key motive behind buyback decisions for an

important subset of buyback firms. Concurrent insider trading does indeed appear to be useful in

identifying mispricing driven buyback cases.

Future researchers may wish to consider whether the return drifts observed here and also reported

by others for many years now are perhaps affected by direct or indirect trading costs thus giving the

appearance of this anomaly surviving through time. While explicitly addressing this was beyond the

scope of this paper, several of the empirical methods we rely on here use portfolios weighted toward more

easily traded shares with comparatively lower trading costs. Another extension of this work would be to

consider whether other groups of informed traders, such as institutional investors, similarly provide

marginal information useful in identifying buyback cases driven by undervaluation.

Chan acknowledges the financial support from the Seed Funding for Basic Research at the

University of Hong Kong. Ikenberry completed much of this work while on the faculty at the University of

Illinois at Urbana-Champaign.

16

References

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Journal of Finance, vol. 51, no. 5 (December): 1959-1970. Michel, A., J. Oded, and I. Shaked. 2010. “Not All Buybacks are Created Equal: The Case of Accelerated Stock Repurchases.” Financial Analysts Journal, vol. 66, no. 6 (November/December): 55-72. Ofek, E., and D. Yermack. 2000. “Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership.” Journal of Finance, vol. 55, no. 3 (June): 1367-1384. Roll, R. 1986. “The Hubris Hypothesis of Corporate Takeover.” Journal of Business, vol. 59, no. 2 (April): 197-216. Rozeff, M., and M. Zaman. 1988. “Market Efficiency and Insider Trading: New Evidence.” Journal of Business, vol. 61, no. 1 (January): 25-44. Seyhun, N. 1986. “Insiders' Profits, Costs of Trading, and Market Efficiency.” Journal of Financial Economics, vol. 16, no. 2 (June): 189-212. Seyhun, N. 1988. “The Information Content of Aggregate Insider Trading.” Journal of Business, vol. 61, no. 1 (January): 1-24. Vermaelen, T. 1981. “Common Stock Repurchases And Market Signaling.” Journal of Financial Economics, vol. 9, no. 2 (June): 139-183.

18

Table 1 Summary Statistics by Insider Trading Group

This table reports summary information regarding sample repurchase firms. The sample includes all share repurchase announcements included in the Securities Data Corporation's share repurchase data from January 1990 to November 2010, with available CRSP daily returns and book equity information from the Compustat. P and S respectively represent insider purchases and sales transactions not related to the exercises of options within the past six months prior to a buyback announcement. Insider transactions are identified based on the filing dates and limited to those that are filed during the six-month period prior to the buyback announcement. Transactions with fewer than 100 shares or cases filed more than two months after the transaction date are excluded. Size of trade is the percentage of shares traded by insiders relative to total outstanding shares at month-end prior to the announcement. Dollar value of insider trading is expressed as thousands of dollars and adjusted to 2010 purchasing power using the US consumer price index. Size is the market value of equity at month-end prior to the announcement and is expressed in millions. B/M is the ratio of the book value of equity at the previous fiscal year-end to the market value of equity at month-end prior to the announcement. Size deciles and B/M quintiles are defined using the cutoffs based on NYSE firms only. The Prior One Year Return for repurchase firms is the buy-and-hold return from 252 days before (or the listing date) up to the day before the announcement. Each repurchase firm has five control firms, matched on the basis of size, B/M and exchange. The t-test’s null hypothesis is that the mean prior one-year abnormal return is zero. p-values are from the Wilcoxon sign test for the equality of medians. 5-day Announcement Return is calculated by subtracting the matching firm return during the five-day window (-2, +2) around repurchase announcements. % of Shares Announced is the percentage of announced repurchase shares relative to total outstanding shares at month-end prior to the announcement. Net Buy represents firms with a greater number of insider purchases than sales during the six-month period prior to buyback announcements. Intensive Buy represents firms with at least three more insider purchases than sales during the six-month period prior to buyback announcements. Non Net (Non Intensive) represents repurchase firms that are not included in Net Buy (Intensive Buy) firms. To avoid the impact of skewness, all variables are winsorized at the top and bottom 1%. Numbers in the parentheses are median values.

Total Net Buy Non Net Intensive Buy Non IntensiveFirm Characteristics

Size $3,513 ($438) $2,636 ($262) $3,907 ($557) $2,405 ($232) $3,624 ($472)B/M 0.71 (0.56) 0.76 (0.62) 0.69 (0.53) 0.76 (0.62) 0.70 (0.55) Size decile 4.17 (3.00) 3.64 (2.00) 4.41 (4.00) 3.38 (2.00) 4.25 (3.00) B/M quintile 3.13 (3.00) 3.34 (4.00) 3.04 (3.00) 3.35 (3.00) 3.11 (3.00)

Prior One Year Return(%)

Repurchase firms 4.48 (2.21) 0.60 (-1.45) 6.30 (4.28) -2.11 (-2.67) 5.17 (2.96) Matching firms 20.02 (14.40) 16.74 (11.04) 21.55 (15.78) 15.71 (8.77) 20.47 (14.89) Difference -15.48 (-12.07) -16.00 (-12.04) -15.24 (-12.07) -17.61 (-11.85) -15.26 (-12.08)t-stat/p-value -31.64 (0.00) -25.60 (0.00) -18.62 (0.00) -29.85 (0.00) -10.49 (0.00)

5-day Announcement Return (%)

Abnormal Return 1.83 (1.59) 2.17 (1.97) 1.68 (1.40) 2.37 (1.96) 1.78 (1.53) t-stat/p-value 19.50 (0.00) 14.78 (0.00) 13.01 (0.00) 18.06 (0.00) 7.55 (0.00)

% of Shares Announced 6.53 (5.03) 6.35 (5.00) 6.61 (5.10) 5.92 (5.00) 6.59 (5.10) Insider Trading

Number of trades (P) 1.30 (0.00) 3.53 (2.00) 0.29 (0.00) 7.26 (6.00) 0.70 (0.00) Number of trades (S) 1.41 (0.00) 0.38 (0.00) 1.88 (1.00) 0.45 (0.00) 1.51 (0.00) Size of trades (P) 0.08% (0.00%) 0.21% (0.04%) 0.02% (0.00%) 0.41% (0.12%) 0.04% (0.00%)Size of trades (S) 0.32% (0.00%) 0.13% (0.00%) 0.41% (0.01%) 0.14% (0.00%) 0.34% (0.00%)Dollar value (P) $264 ($0) $660 ($119) $86 ($0) $1,189 ($357) $171 ($0) Dollar value (S) $3,440 ($0) $998 ($0) $4,538 ($64) $1,322 ($0) $3,653 ($0)

Number of Firms 9,976 3,095 6,881 913 9,063

19

Table 2 Average Insider Transactions around Share Repurchase Announcements

Purchases (Sales) is the mean number of insider purchase (sell) transactions during the six months preceding a repurchase announcement made on the open market or through a private transaction. No-opt Sales is the mean number of insider sells not related to an option exercise. Six-month represents a given six-month interval relative to the repurchase announcement date. REP represents share repurchasing firms and MAT represents the corresponding matching firms. Diff is the difference between repurchase firms and their corresponding matching firms. For each sample repurchase firm, there are five control firms matched on the basis of size, B/M and exchange. Growth subsample and Value subsample are composed of the bottom B/M quintile and the top B/M quintile, respectively. a, b, and c denote significance levels of 1%, 5%, and 10% for a t-test examining the equality of two averages.

Six- Purchase Sell No-opt Sales Month REP MAT Diff REP MAT Diff REP MAT Diff

Panel A: Full sample -4 1.11 0.85 0.27a 2.75 1.96 0.79a 1.34 0.97 0.37a -3 1.11 0.86 0.25a 2.96 2.18 0.78a 1.39 1.06 0.33a -2 1.17 0.89 0.28a 3.20 2.41 0.79a 1.48 1.17 0.31a -1 1.19 0.99 0.20a 3.07 2.65 0.42a 1.37 1.31 0.06c 1 1.18 0.94 0.24a 2.95 2.74 0.21a 1.29 1.33 -0.04 2 1.02 0.91 0.11a 2.98 2.71 0.27a 1.33 1.28 0.05 3 1.01 0.87 0.14a 3.00 2.54 0.46a 1.31 1.17 0.14 a 4 0.98 0.88 0.10a 2.80 2.40 0.40a 1.20 1.10 0.10a

Panel B: Growth subsample -4 0.79 0.81 -0.02 4.93 2.64 2.29a 2.26 1.16 1.09a -3 0.82 0.83 -0.02 5.42 2.83 2.59a 2.38 1.23 1.15a -2 0.75 0.85 -0.10c 6.02 3.18 2.85a 2.58 1.35 1.23a -1 0.78 0.90 -0.12b 6.18 3.42 2.75a 2.53 1.44 1.08a 1 0.97 0.88 0.09 5.24 3.43 1.80a 2.07 1.38 0.69a 2 0.78 0.85 -0.08 5.02 3.45 1.57a 2.06 1.36 0.69a 3 0.79 0.84 -0.06 4.76 3.20 1.56a 1.95 1.20 0.76a 4 0.81 0.89 -0.08 4.53 3.13 1.40a 1.79 1.17 0.62a

Panel C: Value subsample -4 1.25 0.87 0.38a 1.20 1.24 -0.04 0.66 0.73 -0.07 -3 1.33 0.92 0.41a 1.31 1.33 -0.02 0.78 0.77 0.01 -2 1.57 0.96 0.61a 1.39 1.53 -0.14b 0.79 0.89 -0.11b -1 1.47 1.06 0.40a 1.24 1.66 -0.42a 0.71 0.99 -0.28a 1 1.30 0.97 0.33a 1.45 1.76 -0.30a 0.81 1.02 -0.20a 2 1.14 0.95 0.19a 1.63 1.87 -0.24a 0.89 1.07 -0.18a 3 1.10 0.91 0.19a 1.86 1.77 0.09 0.97 0.97 0.00 4 1.02 0.87 0.16a 1.68 1.64 0.04 0.87 0.89 -0.03

20

Table 3 Event-Time Average Monthly Returns (in %)

This table reports sample mean monthly returns in percent around repurchase announcements made between 1990 and 2006. For each repurchasing firm, average monthly returns are calculated over each event year from the year before to four years after a buyback announcement. n is the number of firms in each category. REP refers to the share repurchase sample and MAT refers to their respective matching firms. For each repurchase firm, there are five control firms matched on the basis of size, B/M and exchange. DIFF is the mean abnormal monthly return, the difference between monthly returns of repurchasing and corresponding matching firms. Growth subsample and Value subsample are composed of the bottom B/M quintile and the top quintile, respectively. In Panel A, all repurchase firms in our sample are included. In Panel B, Net Buy represents sample firms with a greater number of insider purchase trades than sales during the six-month period prior to a buyback announcement. In Panel C, Non Net represents sample firms that are not included in Net Buy firms. Panel D shows the difference between Net Buy versus Non Net. In Panel E, Intensive Buy represents sample firms with at least three more insider purchase trades than sales during the six-month period prior to a buyback announcement. In Panel F, Non Intensive represents sample firms that are not classified as Intensive Buy firms. Panel G shows the difference between Intensive Buy versus Non Intensive. a, b, and c represent significant levels at 1%, 5% and 10% levels, respectively. To avoid outliers dominating the results, returns are winsorized at the top and bottom 1%. Event Full Sample Growth subsample Value subsample Year N REP MAT DIFF t-stat n REP MAT DIFF t-stat n REP MAT DIFF t-stat

Panel A: All-1 9018 0.76 1.50 -0.74 -19.71 1648 1.38 1.75 -0.37 -3.68 2139 0.20 1.23 -1.03 -14.16 1 9018 1.58 1.32 0.26 7.33 1648 1.40 1.24 0.16 2.02 2139 1.72 1.46 0.27 5.05 2 8655 1.33 0.96 0.36 9.25 1582 1.04 0.84 0.20 1.76 2044 1.50 1.02 0.48 6.47 3 8030 1.10 0.84 0.26 4.63 1491 1.19 0.98 0.21 2.20 1834 1.02 0.71 0.31 1.99 4 7358 0.98 0.92 0.05 0.49 1390 1.03 0.73 0.30 1.58 1641 0.91 0.93 -0.02 -0.74

Panel B: Net Buy-1 2872 0.39 1.36 -0.96 -13.70 407 0.91 1.35 -0.45 -3.35 770 -0.05 1.12 -1.17 -9.01 1 2872 1.75 1.44 0.31 5.38 407 1.35 1.26 0.10 0.60 770 2.11 1.67 0.44 4.36 2 2766 1.50 1.06 0.44 7.02 387 1.00 0.93 0.07 0.77 743 1.61 1.14 0.47 4.17 3 2547 1.29 1.01 0.28 3.22 364 0.97 1.05 -0.09 -0.98 663 1.22 1.05 0.17 1.34 4 2317 0.97 0.91 0.05 -0.66 340 0.81 0.53 0.28 0.25 584 1.10 1.05 0.05 0.00

Panel C: Non Net-1 6146 0.92 1.56 -0.64 -14.70 1241 1.53 1.88 -0.34 -2.42 1369 0.34 1.30 -0.96 -11.01 1 6146 1.50 1.27 0.23 5.23 1241 1.41 1.23 0.18 1.97 1369 1.50 1.33 0.17 3.05 2 5889 1.24 0.92 0.32 6.43 1195 1.06 0.81 0.25 1.58 1301 1.44 0.96 0.48 4.95 3 5483 1.01 0.77 0.24 3.41 1127 1.26 0.96 0.31 3.02 1171 0.91 0.53 0.38 1.48 4 5041 0.98 0.93 0.05 0.99 1050 1.10 0.79 0.31 1.66 1057 0.80 0.87 -0.07 -0.91

Panel D: Difference between Net Buy and Non Net-1 -0.53a -0.20b -0.33a -0.63a -0.52 -0.11a -0.38a -0.17 -0.21a

1 0.25a 0.17 0.08a -0.06 0.03 -0.08 0.61a 0.34c 0.27a

2 0.26a 0.14b 0.12 -0.06 0.12 -0.18 0.16 0.17 -0.01 3 0.27a 0.24 0.04a -0.30 0.10a -0.39c 0.31c 0.52 -0.20c

4 -0.01 -0.02a 0.00a -0.29 -0.26 -0.03 0.30c 0.18 0.12b

Panel E: Intensive Buy-1 827 0.16 1.40 -1.24 -8.77 119 0.60 1.83 -1.23 -3.36 213 -0.33 1.51 -1.85 -6.06 1 827 1.75 1.38 0.37 2.66 119 1.26 1.11 0.15 0.49 213 2.15 1.55 0.60 2.04 2 799 1.43 0.89 0.53 4.10 114 0.79 0.70 0.09 0.67 206 1.55 0.80 0.75 2.70 3 723 1.42 1.07 0.35 3.10 109 1.35 0.78 0.57 1.40 180 1.37 1.49 -0.12 1.10 4 645 1.14 1.05 0.09 -0.12 100 0.62 0.25 0.38 -0.54 158 1.53 1.50 0.03 0.38

Panel F: Non Intensive-1 8191 0.81 1.50 -0.69 -17.98 1529 1.44 1.74 -0.30 -2.92 1926 0.26 1.20 -0.95 -12.94 1 8191 1.56 1.31 0.25 6.85 1529 1.41 1.25 0.16 1.96 1926 1.68 1.45 0.23 4.64 2 7856 1.32 0.97 0.34 8.42 1468 1.06 0.85 0.21 1.65 1838 1.50 1.05 0.45 5.92 3 7307 1.07 0.82 0.25 3.89 1382 1.18 1.00 0.18 1.90 1654 0.98 0.63 0.35 1.74 4 6713 0.96 0.91 0.05 0.55 1290 1.06 0.76 0.30 1.77 1483 0.84 0.87 -0.02 -0.87

Panel G: Difference between Intensive Buy and Non Intensive-1 -0.65a -0.11a -0.55a -0.84a 0.09b -0.93 -0.59a 0.31c -0.90 1 0.19c 0.07 0.12 -0.15 -0.13 -0.01 0.47b 0.10 0.37b

2 0.11 -0.08 0.19 -0.27 -0.15 -0.12 0.06 -0.24 0.30 3 0.36a 0.25b 0.10 0.17 -0.21 0.38 0.39 0.86 -0.48 4 0.18 0.14 0.04a -0.44 -0.52 0.08 0.69a 0.63 0.06b

21

Table 4 Conventional Performance Metrics using Value-weighted Calendar Time Portfolios

This table reports annualized metrics of portfolio performance for our sample and various sub-samples formed on the basis of insider trading criteria during the period January 1991 to December 2010. In each month, buyback portfolios are formed based on the buyback announcements made during the previous 12 months. Mean represents the annualized time-series average of calendar-time monthly portfolio returns. This is also reported for various sub portfolios and also for style-based reference portfolios for comparison. The Sharpe, Treynor and Information Ratios are reported in an annualized format. Sharpe ratio is the average excess return (i.e., portfolio return minus one-month Treasury Bill return) divided by the standard deviation of that excess return. Treynor ratio is the average excess portfolio return divided by its estimated beta. Information ratio is the average difference in return between a sample portfolio and a given naively formed benchmark divided by the standard deviation of those return differences. REP represents the full sample of repurchase firms. Net Buy represents sample firms classified as having a greater number of purchases than sales during the six-month period prior to a buyback announcement. Non Net represents sample firms that are not included in Net Buy firms. Intensive Buy represents sample firms with at least three more purchases than sales during the six-month period prior to a buyback announcement. Non Intensive represents sample firms that are not classified as Intensive Buy firms. Net Buy – Value represents Net Buy sample firms with B/M ratios in the top-B/M quintile. Intensive Buy – Value represents Net Intensive Buy sample firms with B/M ratios in the top-B/M quintile. Small, Large, Value, Growth and Market are reported as reference portfolios for comparison purposes and represent small firms, large firms, high B/M firms, low B/M firms and the CRSP value weighted index, respectively. These reference portfolio returns are obtained from Kenneth French’s website. Firm returns are winsorized at the top and bottom 1%.

Mean (in%)

Sharpe ratio

Treynor ratio

Information ratio relative to Small Value Small-

Value Market

Full sample REP 10.4 0.47 0.08 -0.24 -0.19 -0.50 0.01

Net Buy vs. Non Net Net Buy 10.5 0.44 0.09 -0.20 -0.15 -0.42 0.01 Non Net 10.4 0.45 0.08 -0.25 -0.18 -0.50 0.01

Intensive Buy vs. Non Intensive Intensive Buy 13.2 0.52 0.13 -0.05 0.06 -0.21 0.19 Non Intensive 10.2 0.44 0.08 -0.26 -0.22 -0.53 -0.03

Net Buy vs. Non Net in Value subsample Net Buy – Value 16.2 0.60 0.17 0.09 0.24 -0.05 0.32 Non Net – Value 8.3 0.24 0.05 -0.29 -0.30 -0.52 -0.15

Intensive Buy vs. Non Intensive in Value subsample Intensive Buy – Value 26.2 0.89 0.34 0.43 0.60 0.37 0.66 Non Intensive – Value 9.4 0.30 0.07 -0.25 -0.23 -0.48 -0.07

Other Reference Portfolios Small 14.3 0.51 0.10 0.00 0.14 -0.34 0.31 Large 10.0 0.44 0.07 -0.29 -0.25 -0.56 -0.15

Growth 10.2 0.43 0.07 -0.29 -0.18 -0.51 -0.04 Value 12.2 0.53 0.10 -0.14 0.00 -0.54 0.21

Small Value 17.2 0.71 0.14 0.34 0.54 0.00 0.61 Market 10.4 0.45 0.07 -0.31 -0.21 -0.61 0.00

22

Table 5 Monthly Abnormal Returns from Times-Series Factor Models

This table reports intercepts (in %) from the Fama-French (1993) three-factor model and the Carhart (1997) four-factor model. The three-factor and four-factor models are specified as follows:

ttttftmtftp ehHMLsSMBRRRR )( ,,,,

tttttftmtftp ewWMLhHMLsSMBRRRR )( ,,,,

where Rp is the repurchase firm portfolio return in a given month, Rf is the risk-free rate, Rm is the market portfolio return, SMB is the small-firm portfolio return minus big-firm portfolio return, and HML is the high book-to-market portfolio return minus the low book-to-market portfolio return, WML is the high prior-return portfolio return minus the low prior-return portfolio return. For each month from January 1991 to December 2010, we form a calendar-time portfolio by including sample firms that have announced repurchase programs in the past 12 months. Net Buy represents sample firms with a greater number of purchases than sales during the six-month period prior to a buyback announcement. Non Net represents sample firms that are not classified as Net Buy firms. Intensive Buy represents sample firms with at least three more purchases than sales during the six-month period prior to a buyback announcement. Non Intensive represents sample firms that are not included in Intensive Buy firms. Difference stands for a long/short portfolio, long in buying and short in non-buying portfolios. Each portfolio assumes a value-weighted investment strategy. Numbers in the parentheses are t-statistics. Firm returns are winsorized at the top and bottom 1%.

Jan. 1991- Dec. 2010 Jan. 1991- Dec. 1997 Jan. 1998- Jan. 2005 Feb. 2005- Dec. 2010

3-Factor 4-Factor 3-Factor 4-Factor 3-Factor 4-Factor 3-Factor 4-Factor

Panel A: Net Buy vs. Non Net in Full sample

Net Buy 0.1073 0.1382 0.2621 0.4363 -0.1245 -0.0527 -0.0653 -0.0669 (0.70) (0.89) (1.16) (1.91) (-0.42) (-0.17) (-0.21) (-0.22) Non Net 0.1121 0.1495 0.1585 0.2790 0.1384 0.2104 -0.0552 -0.0580 (0.93) (1.23) (0.96) (1.67) (0.56) (0.85) (-0.31) (-0.32) Difference -0.0381 -0.0486 0.1036 0.1573 -0.2628 -0.2631 -0.0101 -0.0089 (-0.21) (-0.27) (0.43) (0.62) (-0.67) (-0.66) (-0.03) (-0.03)

Panel B: Intensive Buy vs. Non Intensive in Full sample Intensive Buy 0.3235 0.3484 0.8755 1.0737 0.4037 0.4200 -0.3333 -0.3368 (1.21) (1.29) (1.90) (2.25) (0.97) (0.99) (-0.67) (-0.67) Non Intensive 0.0310 0.0735 0.1091 0.2226 0.0308 0.1056 -0.0500 -0.0525 (0.29) (0.68) (0.71) (1.43) (0.16) (0.55) (-0.30) (-0.32) Difference 0.2925 0.2749 0.7665 0.8512 0.3729 0.3145 -0.2833 -0.2843 (1.10) (1.02) (1.69) (1.79) (0.88) (0.73) (-0.56) (-0.56)

Panel C: Net Buy vs. Non Net in Value subsample Net Buy 0.4943 0.4821 1.3938 1.4046 0.4550 0.4625 -0.9981 -1.0191 (1.68) (1.61) (3.05) (2.95) (1.01) (1.01) (-1.36) (-1.39) Non Net -0.1113 -0.0082 -0.0259 0.1121 -0.1779 -0.0318 -0.5072 -0.5253 (-0.49) (-0.04) (-0.07) (0.29) (-0.37) (-0.07) (-1.52) (-1.61) Difference 1.2464 1.0784 1.3982 1.2910 0.6329 0.4943 -0.4909 -0.4939 (2.96) (2.57) (2.65) (2.35) (0.96) (0.74) (-0.61) (-0.61)

Panel D: Intensive Buy vs. Non Intensive in Value subsample Intensive Buy 1.3167 1.4082 1.5691 2.3734 1.4572 1.6353 -0.1464 -0.1719 (2.96) (3.13) (2.93) (2.81) (1.84) (2.05) (-0.19) (-0.23)Non Intensive -0.1966 -0.1224 0.0513 0.3070 -0.0964 0.0085 -0.4068 -0.4168 (-0.85) (-0.53) (0.20) (0.92) (-0.23) (0.02) (-1.00) (-1.02) Difference 1.5396 1.5606 1.4998 2.0546 1.5702 1.6475 0.3143 0.2996 (3.34) (3.33) (2.75) (2.46) (1.84) (1.90) (0.42) (0.39)

23

Figure 1. Cumulative monthly returns of buyback firms and the market portfolio (logarithmic scale)

Monthly returns of each portfolio are cumulated over the period from January 1991 and December 2010. Returns are reported as the natural logarithm of one plus the

cumulative monthly return. When portfolio returns are missing in a given month due to a lack of eligible stocks, the S&P 500 index return is spliced into the series for that month.

Market stands for the CRSP value-weighted index return. REP represents the full sample of repurchase firms. Intensive Buy represents sample firms with at least three more

purchases than sales during the six-month period prior to a buyback announcement. Net Buy – Value represents Net Buy sample firms with B/M ratios in the top-B/M quintile

where Net Buy represents sample firms classified as having a greater number of purchases than sales during the six-month period prior to a buyback announcement.. Intensive

Buy – Value represents Net Intensive Buy sample firms with B/M ratios in the top-B/M quintile. Firm returns are winsorized at the top and bottom 1%.