Signaling or insider opportunism: an investigation of repurchase activity in Vietnam

Abstract

This paper examines whether share repurchase announcements are signals of undervaluation or insiders’ opportunistic activities by investigating insider trading patterns surrounding buyback announcements in Vietnam. Consistent with the insider opportunism hypothesis, we show that insiders are net buyers before the announcements but they sell intensively after the event. We also find that repurchase announcements with subsequent net insider selling are not followed by an improvement in firms’ operating performance but associated with underperformance in long-term stock returns. Overall, our findings suggest that a proportion of repurchase announcements in Vietnam are subject to insider opportunism; therefore, short-swing rules should be regulated to limit insider opportunistically trading around repurchase announcements.

Keywords:

• share repurchase
• insider trading
• signaling hypothesis
• insider opportunism
• managerial opportunism
• Vietnam

PUBLIC INTEREST STATEMENT

As the cost of purchasing security on an exchange, stock prices (SP) are affected but not restricted to exchange rate (ER), information asymmetry, and size of the company among others. Considering the fact that market volatility is mostly determined by the interplay of ERand stock price movement, the study explains the nature of the relationship existing between SP and ER in the long run, and as well identify how increase/decrease in ER or share prices can affect each other. Based on the monthly data generated from National Bureau of Statistics used to estimate the relationship and direction of causality between SP and ERs, we found a stable long-run and bidirectional relationship between SP and ER. This implies that future volatility in stock and exchange markets affects each other greatly by past movement in either of the markets. Thus, this affects the investor’s confidence and the level of investment in the markets.

Public interest

Share repurchase is one of the important corporate events that have attracted attention from investors and regulators. The most cited reason of buybacks is that firm shares are undervalued. However, repurchase announcements are not binding obligations, thus, they might be used for managerial self-interest, such as boosting stock prices when the managers desire to sell their shares. This study examines whether share repurchase announcements are signals of undervaluation or insiders’ opportunistic activities in Vietnam. As a young market, the regulations regarding buybacks and insider trading surrounding the event in Vietnam are dissimilar to matured markets, making it necessary to study for Vietnam. The results show that insiders are net buyers before the repurchase announcements but sell intensively after the event. In addition, the announcements with subsequent net insider selling are not followed by an improvement in firms’ operating performance but associated with long-term stock underperformance. In short, our findings suggest that a proportion of repurchase announcements in Vietnam are subject to insider opportunism, therefore, short-swing rules should be regulated to limit insider opportunistically trading around repurchase announcements, which in turn enhances the protection for long-term investors.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. http://www.cafef.vn

2. In Vietnam, companies can reward stocks for employees who work for them in a certain number of years as a remuneration and incentive for long-term commitments. If an employee is made redundant or leaves the company earlier than a certain period, he or she is forced to sell their rewarded shares back to the company.

3. Results for the sample that only includes non-financial firms are available upon request.

4. Babenko, I., Tserlukevich, Y. and Vedrashko, A. (2012). “The Credibility of Open Market Share Repurchase Signaling”. The Journal of Financial and Quantitative Analysis, Vol. 47 No. 5, pp. 1059–1088. report that 98% of repurchasing firms in the U.S disclose the dollar value of shares repurchased and more than 20% do not report the number of shares repurchased.

5. We also report market-adjusted returns as robustness checks that are available upon request. Market adjusted returns are calculated by subtracting market returns from individual stock returns

6. There are currently three stock exchanges in Vietnam (Ho Chi Minh Stock Exchange—HSX; Hanoi Stock Exchange—HNX; and Unlisted Public Company Market—UPCOM). Daily trading band of stocks listed on HSX is (1 $\pm$ 7%) x reference prices whereas daily trading band of stocks listed on Hanoi Exchange is (1 $\pm$ 10%) x reference prices, and trading band of UPCOM stocks is (1 $\pm$ 15%) x reference prices. These price trading bands are defined by the exchanges.

Additional information

Funding

This work is funded by University of Economics Ho Chi Minh City.

Notes on contributors

Ly Thi Hai Tran

Ly Thi Hai Tran is an associate professor in Finance at School of Finance, University of Economics Ho Chi Minh City, Vietnam. She teaches corporate finance, investment, and behavioral finance. Her research interests include corporate financial events, stock returns, market efficiency, and financial markets. Her studies have been published in Emerging Markets Review, International Journal of Emerging Market, International Journal of Managerial Finance, and Research in International Business and Finance.

Thao Thi Phuong Hoang

Thao Thi Phuong Hoang is a lecturer in the School of Finance, University of Economics Hochiminh City, Vietnam. Her research focuses on corporate finance and market behaviors. Her teaching includes corporate finance and behavioral finance. Her studies have been published in Emerging Markets Review and International Journal of Managerial Finance.