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Open‐Market Stock Repurchases by Insurance Companies and Signaling
Author(s) -
Huang GowCheng,
Liano Kartono,
Manakyan Herman,
Pan MingShiun
Publication year - 2013
Publication title -
risk management and insurance review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 16
eISSN - 1540-6296
pISSN - 1098-1616
DOI - 10.1111/rmir.12003
Subject(s) - share repurchase , open market operation , business , monetary economics , stock (firearms) , abnormal return , stock market , finance , financial system , economics , stock exchange , monetary policy , corporate governance , shareholder , mechanical engineering , paleontology , horse , biology , engineering
The signaling hypothesis of share repurchases implies that management uses repurchases to signal either that their firm's future operating performance will improve or that shares of their stock are simply underpriced by the market. This study examines which of the two interpretations can better explain open‐market share repurchase programs announced by insurance companies. We find no evidence that future‐operating performance of insurers improves following the repurchase announcement. In addition, changes in future operating performance cannot explain the announcement‐period abnormal return. Instead, the stock undervaluation prior to the repurchase announcement can significantly explain the announcement‐period abnormal return, particularly for life insurers. Overall, our results suggest that the positive market reaction to insurers’ open‐market share repurchase announcements is due to the stock undervaluation by the market, but not due to positive information content about future operating performance conveyed in the repurchase announcement.