Investor sentiment, trading activity and effect of the open-market share repurchase based on firm characteristics

ABSTRACT

This study realises that before and after disclosure of repurchase information of share repurchasing firms, there are significant differences in investor sentiment towards the repurchasing stock. With repurchase information, repurchasing firms attempt to reduce negative investor sentiment towards the firms, thereby supporting the sentiment change motivation hypothesis. In addition, this study demonstrates that relationship between investor sentiment and stock returns differs according to investor groups. Margin trading investors, in particular, have irrational investor sentiment on share repurchase events. Finally, firm characteristics that support share repurchase influence the relationship between investor sentiment and cumulative abnormal returns in the study period.

RESUMEN

Este estudio muestra la existencia de diferencias significativas en el sentimiento de los inversores hacia la recompra de acciones antes y después de la divulgación de la información sobre la recompra de acciones. Las empresas que recompran acciones intentan reducir el sentimiento negativo de los inversores hacia las empresas cuando se conoce la información sobre las recompras, de forma consistente con la hipótesis de motivación del cambio de sentimiento. Además, este estudio pone de manifiesto que la relación entre el sentimiento de los inversores y los rendimientos de las acciones difiere según los grupos de inversores. Los inversores que operan mediante cuentas con posibilidad de venta en descubierto, en particular, tienen un sentimiento irracional con respecto a las recompras de acciones. Por último, las características empresariales que apoyan la recompra de acciones influyen en la relación entre el sentimiento del inversor y los rendimientos anormales acumulados en el período de estudio.

KEYWORDS:

• Investor sentiment
• effect of the open-market share repurchase
• firm characteristics
• sentiment change motivation hypothesis

PALABRAS CLAVE:

• Sentimiento del inversor
• efecto de la recompra de acciones de mercado abierto
• características de la empresa
• hipótesis de motivación de cambio de sentimiento

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. This study first tests stock repurchase by the event window as [−20,+45] and event estimation period as [−220, −21] to observe the effect on the trend of stock price of repurchase firms from the month before the event day to 2 months after the event day. The result shows that the average CA of the trading day (−1) before the event day significantly and considerably becomes positive. Hence, the trading day before the event day is the base day of information disclosure. The average CAR of the 40th trading day after event day starts declining. It means that the effect of actual execution period of repurchase disappears gradually on the 40th trading day after event day. Based on the result of pretest, it defines specific shock day (−1) of repurchase information disclosure. From the previous month (−21) to 2 months after the event day (+40), it defines [−21, +40] as the event window. CA of the trading day (−1) before the event day significantly and considerably becomes positive. Hence, the trading day before the event day is the base day of the information disclosure. The average CAR of the 40th trading day after the event day starts declining. It means that the effect of the actual execution period of the repurchase disappears gradually on the 40th trading day after the event day. Based on the results of the pre-test, it defines the specific shock day (−1) of the repurchase information disclosure. From the previous month (−21) to 2 months after the event day (+40), it defines [−21, +40] as the event window.

2. It includes almost all the actual repurchase period.

3. According to Article 22-2 of the Securities and Exchange Act, when the insiders’ daily transferred shares are more than 10,000, they must declare them in advance. Article 26 regulates all directors’ and supervisors’ lowest shareholding ratios. Article 157 regulates short-term insider trading and short-term exchange is strictly forbidden (6 months).

4. Finance investors sentiment might be reflected in daily trading behaviour since the daily write-off ratio is significantly different.