Wealth and liquidity effects of share repurchases - Evidence from Finland 1998 - 2008

Abstract

PURPOSE OF THE STUDY The objective of the study is to measure the wealth effects surrounding share repurchase announcements and initial actual share repurchases. As the first research question state, I examine whether the events have increased shareholder value and how the returns have differed from each other. Also key drivers behind the observed returns are analyzed and compared to the findings of previous literature. Finally, liquidity effects are evaluated surrounding the same events. Since liquidity effects around the above-mentioned events have not been studied earlier with Finnish data, I investigate whether companies have been able to increase liquidity on the Helsinki Stock Exchange through the announcements as stated in the second research question.

DATA The study focuses on all listed Finnish companies trading on the Helsinki Stock Exchange between 1998 – 2008. The announcements of share repurchase programs and initial actual repurchases are collected from Kauppalehti online and NASDAQ OMX database for corporate press releases. The final dataset includes 466 repurchase program announcements from 93 companies and 133 initial repurchases from 58 companies. Share information as well as accounting data is gathered from Thomson ONE Banker and information about foreign ownership from Euroclear Finland Oy.

RESULTS The main findings of this study are that companies increase, on average, shareholder wealth around an announcement of a share repurchase program and around an initial actual repurchase and that small firms generate higher abnormal returns than large firms. The study also finds that signaling and free cash flow hypothesis have some power on explaining the observed cumulative abnormal returns. Finally, it is shown that the discussed events increase liquidity and trading volume in the Finnish stock market between 1998 – 2008.