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					                      MOTIVATION FOR REPURCHASE:
                       A LIFE CYCLE EXPLANATION

                                         Wei-Hsien Lai
                       Department of Finance, Yuan Ze University
                    135, Tuan-Tung Rd, Taoyuan, Ching-li 320, Taiwan
                               s957209@mail.yzu.edu.tw

                                    Woan-lih Liang†
                       Department of Finance, Yuan Ze University
                    135, Tuan-Tung Rd, Taoyuan, Ching-li 320, Taiwan
                               wlliang@saturn.yzu.edu.tw

                                      Yanzhi Wang
                       Department of Finance ,Yuan Ze University
                    135, Tuan-Tung Rd, Taoyuan, Ching-li 320, Taiwan
                               yeanjyh@saturn.yzu.edu.tw

                                        December 2009



                                     ABSTRACT
This study examines, ex ante, the motives for share repurchases. Whereas most prior
research points to either the signaling or free cash flow hypothesis, we find that the
motives for repurchases differ depending on the firm’s life cycle stage.
Specifically, we find that a firm in the growth stage tends to announce repurchase
to signal its undervalued stock whereas a firm in the mature stage is prone to buy
back shares to dispense excess free cash flow. We also find that the market
reaction to repurchase announcements corroborates this life-cycle argument.

Keywords: Repurchase, Life Cycle, Signaling, Free Cash Flow.
JEL Classification: G35; G30.




†
 Corresponding author: Department of Finance, Yuan Ze University, 135, Tuan-Tung Rd., Chung-li,
Taoyuan, Taiwan, 320. Tel: +886-3-4638800 ext. 2671, email: wlliang@saturn.yzu.edu.tw
We appreciate Konan Chan, Steve Chang, Sheng-Syan Chen, Wei-feng Hong, Wei Li, Yan-ping Sheng
and participants in 2009 CSBF Conference on Cross-Strait Banking and Finance for helpful comments
and suggestions. Liang gratefully thanks funding support from the National Science Council of Taiwan
(NSC97-2410-H-155-051-).

                                                 1
                                 1. INTRODUCTION
The reasons why firms announce share buyback have been well investigated in
the existing literature and include undervaluation, free cash flow distribution,
capital structure adjustment, prevention of share dilution from employee stock
option, and take-over defense (Dittmar, 2000; Grullon and Ikenberry, 2000).
Among the numerous studies, the most widely accepted theories for share
repurchases are the information signaling hypothesis (e.g., Chan, Ikenberry, and
Lee, 2004; Ikenberry, Lakonishok, and Vermaelen; 1995; Lie, 2005; Peyer and
Vermaelen, 2009) and the free cash flow hypothesis (e.g., Grullon and Michaely,
2004; Nohel and Tarhan, 1998). Specifically, the information signaling
hypothesis suggests that the firm has an incentive to buy back its own shares as a
good self-investment signal when its stock price is undervalued. Alternatively,
the free cash flow hypothesis presents the repurchase shares as a way to
distribute a firm’s excess cash flow to prevent wasteful investments.
     Whereas most prior literature favors either the information signaling
hypothesis or the free cash flow hypothesis, we reconcile these two major
explanations by proposing that the motives for share repurchases may differ
depending on the firm’s life cycle stage. The previous literature commonly uses
the future growth opportunity of the firm, as proxied by return on assets (ROA),
after buying back shares to discriminate the motivation for the repurchase. For
example, Lie (2005) finds that there is positive future growth after repurchase
announcement and argues that the buyback is a signaling for the future prospect.
Conversely, Nohel and Tarhan (1998) and Grullon and Michaely (2004) show
that the future growth of repurchase firms deteriorates and suggest that share
repurchase is authorized to mitigate the potential over-investment problem.
However, the firm’s growth opportunity situation is strongly influenced by its
development stage in the firm’s life cycle. In such a scenario, the motive for
repurchases would likely change in the different stages of the life cycle.
Therefore, we examine the differences in ex ante motivation of firms, in
particular for share repurchases in growth stage versus in mature stage. Such
discrimination helps us to understand the information content behind the
repurchase announcement. Typically, compared with their more mature counterparts,
firms in the early stage of the life-cycle (i.e., the growth stage) have greater
investment opportunities and more serious information asymmetry about the firm’s
future operating performance than the ones in the mature stage do. Conversely, firms
in the late stage (i.e., the mature stage) tend to have greater free cash flow due to
lower growth opportunities. Therefore, we hypothesize that firms in the early stage
may buy back stocks to signal better performance rather than to reduce free cash
flow and firms in the late stage may repurchase to prevent infusing free cash
flows into negative net present value projects. That is, the motivation of the
repurchase is related to the stage of the firm. 1
A key component in this examination is the measure we select to represent the
life cycle of the firm. Numerous variables have been associated with life cycle
stages of firms, including age, firm size, concurrent sales growth, dividend
payout ratio, and stock return volatility (e.g., Anthony, and Ramesh, 1992; Ervin,
1998; Grullon, Michaely, and Swaminathan 2002; Jain and Kini, 1999). We select the
age of the firm as the most appropriate measure because firm age is exogenous
1
  Similarly, DeAngelo, DeAngelo, and Stulz (2006) show the dividend policy is related to the life cycle
of firms. They argue that the large cumulative profits offer firms in mature stage the more incentive to
pay dividends.

                                                   2
whereas firm size, sales growth, and dividend are likely endogenous for the share
repurchase decision. 2 Moreover, some life-cycle measures (e.g., sales growth)
estimated annually may show that the evolution of firms does not trend
consistently year to year. Namely, these measures may lead to a firm being
classified as a mature firm one year and a growth firm in the following year.
Accordingly, firm age is regarded as a more appropriate estimator. The age of the
firm, however, is not available for over 20% of the repurchase sample. Therefore,
we also use the listing age (i.e., the time interval between initial public offering
date and event date) to measure the stage of life cycle.
To test whether the life cycle of the firm relates the motive of the repurchase, we
examine the firm’s book-to-market (B/M) and free cash flow ratios. The B/M
ratio indicates the tendency of the undervaluation of repurchase firms (Ikenberry,
Lakonishok, and Vermaelen, 1995; Lakonishok, Shleifer, and Vishny, 1994), and the
free cash flow ratio displays shows any potential overinvestment problems (Chan,
Ikenberry, and Lee, 2004; Lehn and Poulsen, 1989). To fit the two ratios into the
firm’s life cycle frame, we compare the B/M of the repurchase firms with the B/M of
nonrepurchase firms of a similar listing age. We compare the free cash flow ratio in
the same manner. If the repurchase firm has an abnormally high B/M ratio compared
to its life-cycle counterpart, its motive for repurchase may be to signal undervaluation;
namely, this situation confirms the signaling hypothesis. However, if the repurchase
firm has an abnormally high free cash flow ratio compared with its nonrepurchase
peers, the repurchase incentive is more consistent with the free cash flow hypothesis.
We collect 4,285 repurchase announcements in United States during 1990–2006
to test this presumption. First, we examine size, sales growth, ROA, and
dividend-to-asset ratios sorted by listing age and find that the pattern of these
variables is roughly consistent with the life cycle process. Thus, we confirm that
the listing age is a good proxy for the firm’s life cycle stage. Second, compared
with nonrepurchase firms of a similar age, we find that repurchase firms in the
early stage (i.e., growth stage) tend to have significantly higher B/M ratios
whereas repurchase firms in the late stage (i.e., mature stage) are prone to have a
significantly higher free cash flow ratio. Even when we use the age of firm as the
life cycle estimator, our results do not change. These findings support our life
cycle explanation.
To check the effectiveness of our hypothesis, we also examine the market reaction
to repurchase announcements. According to the signaling and free cash flow
hypotheses, the repurchase firm with higher B/M and higher free cash flow ratios
obtains higher abnormal returns. Based on short-run market reaction and long-run
Fama and MacBeth (1973) return regressions, we find that the abnormal B/M ratio
positively affects the post-event abnormal return only in the early stage whereas
the abnormal free cash flow ratio is only significantly positive in late stage.
These results therefore corroborate our hypothesis that repurchases are motivated
by either signaling or free cash flow reason depends on the firm’s life cycle stage.
Our study has strong implications for the existing literature on share repurchases. First,
most prior studies assume the debate between the signaling and free cash flow
hypotheses, choosing one or the other as the most appropriate explanation for
repurchases. In contrast, we propose an explanation that reconciles these two conflicting

2
  The size of the firm is affected by the pre-event corporate financing policy, such as new issuing,
repurchase, and conversion of convertible bond. The sales of the firm are influenced by some earnings
management concern (Chan, Chan, Jegadeesh, and Lakonishok, 2006). Finally, the dividend relates to
the payout policy of the firm.

                                                 3
hypotheses. We argue that firms with different characteristics may have different
incentives to announce repurchases. Jagannathan and Stephens (2003) also offer
multiple motives for repurchase based on the frequency of repurchases. In their study,
the firms with occasional (frequent) repurchases are more likely to be motivated by
undervaluation (the dividend substitution). Second, we show that a firm’s motivation
for repurchase is affected by the firm’s life cycle stage. Similarly, Nohel and Tarhan
(1998) argue that repurchase may be motivated by the different growth levels, and
Grullon and Michaely (2004) suggest that firms with fewer investment opportunities
would have greater free cash flows. However, they assume that only one hypothesis
(i.e., free cash flow hypothesis) is correct. They may therefore neglect some important
information regarding the firm’s characteristics. Because we link our findings to the
life cycle, we are able to account for changes in the firm’s motives for repurchases,
which vary depending on the life cycle stage. Finally, this paper contributes to the
existing literature in that we examine motives of repurchases ex ante, which provides
deeper insight into the motivation for share repurchases. Such an ex ante examination
helps investors to make investment decision by realizing the information content of
share repurchases at the moment of the announcement.
This paper is organized as follows. Section 2 describes the two prevalent hypotheses
of share repurchases. Section 3 introduces the data and methodologies. Section 4
presents the results regarding B/M, free cash flow, and the life cycle measures.
Section 5 states stock market reaction, and Section 6 presents the conclusion.

           2. SIGNALING AND FREE CASH FLOW HYPOTHESES
There are several potential reasons why firms may repurchase their stocks. These
include capital structure adjustment (Bagwell and Shoven, 1988; Hovakimian, Opler
and Titman, 2001), corporate control (Fenn and Liang, 1998; Jolls, 1996), and
anti-takeover (Bagwell, 1991; Denis, 1990). However, the two prevailing explanations
for repurchasing shares are the information signaling and free cash flow hypotheses.

2.1 The Signaling Hypothesis
The information signaling hypothesis is based on the notion that asymmetric
information between insiders and outsiders causes the firm’s stock to be
mispriced. When the stock is undervalued, the lower cost for the shares
repurchase will translate into profit when these shares are reissued in the future.
Therefore, the repurchase announcement is usually regarded as a good signal to
the market. Empirically, announcement abnormal returns are around 2% to 3%
(Comment and Jarrell, 1991; Vermaelen, 1981).
Moreover, previous studies suggest that the long-run return of repurchase firms is
positively correlated to the B/M ratio. Ikenberry, Lakonishok, and Vermaelen
(1995, 2000) and Chan, Ikenberry, and Lee (2004) find that high B/M repurchase
firms experience abnormal stock return of 30% to 40% in four years following
the repurchase announcement date. Because high B/M ratio firms tend to be
undervalued stocks, investors may respond more positively to these stocks. These
finding indicate that share buybacks convey valuable signals.
B/M ratio is the most widely used proxy for firm valuation. Thus, if a firm tends to
repurchase to signal its undervaluation, then its B/M ratio is expected to be higher
than a similar firm that does not repurchase (i.e., a matching firm).3 Namely, if

3
  The matching firm is controlled for listing age and industry level. See the following discussion for
details of the method used.

                                                  4
information signaling is the motive for repurchase, then the repurchase firm should
have a positive abnormal B/M ratio. 4 Reasonably, investors may have less
information available to estimate the stock price of start-ups compared with mature
firms. Such higher information asymmetry among immature firms makes conveyance
of mispricing information the more likely motive for repurchases in the early stage.5
Moreover, we examine the stock market reaction to repurchase announcement in
terms of B/M ratio. Previous studies find that undervalued firms earn abnormal
returns after repurchase announcements. Thus, our hypothesis that the motive for
repurchase in early stage is to signal undervaluation can be further verified by
considering the stock performance conditional on life-cycle stages. Specifically,
provided that our argument is correct, the abnormal return is positively related to an
abnormal B/M ratio in early stage repurchases, and this positive reaction in stronger
than the reaction in late stage repurchases.
In accordance with the previous discussion, we build the following hypotheses:

H1a: Repurchases in the early stage have positive abnormal B/M ratios, and their
abnormal B/M ratios are higher than those in the late stage.
H1b: The relation between the abnormal B/M ratio and the abnormal return
subsequent to repurchase announcements is positive and higher in the early stage
than it is in late stage.

2.2 Free Cash Flow Hypothesis
Agency theory argues that when a firm’s free cash flow is in excess of investment
opportunities, managers have an incentive to engage in poor performing (or high
risk) projects, which increases their private expected benefit but reduces firm
value. Easterbrook (1984) and Jensen (1986) suggest that share repurchase s
reduce the amount of free cash flow under the control of management and thus
mitigate these opportunistic investment problems. Based on the estimate on free
cash flow ratio, Lehn and Poulsen (1989) find that the gains obtained by stockholders
through private transactions are the result of the mitigation of free cash flow and thus
support the free cash flow hypothesis. Also, Howe, He, and Kao (1992) and Chan,
Ikenberry, and Lee (2004) apply Lehn and Poulsen’s free cash flow measure to
examine whether free cash flow is positively related to the repurchase
announcement return due to the reduction of overinvestment problems.
Accordingly, we use the free cash flow ratio suggested by Howe, He, and Kao (1992)
and Chan, Ikenberry, and Lee (2004) to represent a firm’s tendency to have excessive
cash flows relative to its investment opportunities. We find that mature firms
generally have more free cash flows and fewer investment opportunities than
growth firms. Thus, repurchases around the firm’s late (mature) stage may be
motivated by the free cash flow rationale. Specifically, firms that undertake
repurchases in the late stage tend to have more free cash flow than the matching
firms; in other words, these firms are expected to have positive abnormal free
cash flow ratios in the late stage. Moreover, the reduction of free cash flows by
repurchasing shares helps to improve the firm’s market return (Grullon and
Michaely, 2004). To verify the argument that the motive for repurchase in the late

4
  The abnormal B/M ratio is the B/M ratio of repurchase firm minus the B/M ratio of its benchmark,
which is the median of the matching firms. The detailed calculation of abnormal B/M ratio is stated in
Section 3.2.
5
  Similarly, Barth and Kasznik (1999) argue that repurchase firms with higher information asymmetry
(proxied by research and development investment) earn higher abnormal return.

                                                  5
stage is to distribute free cash flow, we build the following hypotheses:
H2a: Repurchases in the late stage have positive abnormal free cash flow ratios, and
their abnormal free cash flow ratios are higher than those in the early stage.
H2b: The relation between the abnormal free cash ratio and the abnormal return
subsequent to repurchase announcements is positive and higher in the late stage than
it is in early stage.

                              3. DATA AND METHODOLOGIES
3.1 Data
Our sample consists of U.S. repurchase announcements from Securities Data
Company (SDC) database from 1990 to 2006. We eliminate the observations of
ADR, noncommon stocks, and the repeated repurchase announcements within
one month. In addition, we obtain the return and accounting information from
CRSP and Compustat, respectively. In particular, we use the accounting
information at the fiscal year end at least four months prior to the announcement
date to accommodate the accounting reporting lag. We define the time interval
between the initial public offering (IPO) date and the repurchase announcement
date as the listing age.6 To match the IPO date to the listing age, we adopt the
public offering information from SDC since 1970, which is the start of new issue
module in SDC. Moreover, the firm’s age is measured by the time interval
between the founding date and the event date. 7 We use the listing age and firm
age to represent the life cycle of the firm. Finally, our sample consists of 4,285
U.S. repurchase announcements with listing age information.8

3.2 Variables and Methodologies
In the previous literature, the B/M ratio typically represents the magnitude of
mispricing, and the free cash flow ratio usually indicates the tendency for redundant
cash flows. The B/M ratio is the book value of common equity (Compustat Item 60)
divided by the market value of common equity (i.e., CRSP stock price multiplied by
the shares outstanding at previous month end of the repurchase announcement date). A
firm with a high B/M ratio implies that the firm trends toward undervalution.
Moreover, free cash flow could be measured as earnings, minus necessary future
expenditures. We follow Lehn and Paulsen (1989) and define free cash flow ratio as9
    Free Cash Flow Ratio = (OI-IT+ΔDT-INTEX-PFD-DIV ) / SALE,                     (1)
where OI is earnings-before-interest-tax-depreciation (Compustat Item 13), IT is
income taxes (Compustat Item 16), ΔDT is change in deferred tax (Compustat Item
35), INTEX is interest expense (Compustat Item 15), PFD is dividends for preferred
stocks (Compustat Item 19), DIV is dividends for common stocks (Compustat Item
21), and SALE is sales (Compustat Item 12).
To capture the different effects between repurchase firms and nonrepurchase firms,
we further measure the abnormal B/M and abnormal free cash flow ratio by
6
  For example, if a repurchase announcement is authorized at October 20, 2000 and with the IPO
date on January 15, 2000, then this repurchase firm has the listing age equal to nine months (or
9/12 year).
7
   The founding date information is available at http://bear.cba.ufl.edu/ritter/ipodata.htm. We
appreciate Jay Ritter for making these data publicly available online.
8
  When we limit our sample to that with available firm age, the sample size downsizes to 3,312
observations—77% of our main sample size.
9
  Generally, sales is volatile and results in an unstable free cash flow ratio. To avoid this variability, we
also use total asset as the scale variable for the free cash flow measure. The results are quantitatively
similar.

                                                     6
controlling for the firm’s life cycle and industry level.10 Specifically, we match the
sample firm’s B/M ratio with the potential nonrepurchase firms that have the same
listing age and are in same two-digit SIC industry. We then use the median of the
matching firms as the benchmark. The abnormal B/M ratio is the B/M of the
repurchase firm minus the B/M of its benchmark. Similarly, we calculate the
abnormal free cash flow ratio as the repurchase firm’s free cash flow ratio minus the
free cash flow ratio of its benchmark. Therefore, by comparing the abnormal B/M and
abnormal free cash flow ratios in the early stage with the ratios in the late stage, we
can examine the signaling and free cash flow hypotheses of repurchases based on the
life cycle stage of the firm.

   4. ANALYSIS OF THE MOTIVES FOR REPURCHASES IN LIFE CYCLE
                                       STAGES
4.1 Summary Statistics of Sample
Table 1 presents the summary statistics and sample distribution for 4,285 U.S.
repurchase announcements. The average of five-day announcement abnormal return
(measured by the five-day buy-and-hold sample firm return minus corresponding
CRSP value-weighted index return) is about 3.44%. The median of the announcement
abnormal return is about 1.72%. On average, firms announce buybacks of 7.421% of
shares outstanding; the median of announced intended repurchases is 5.53%. In
addition, the average (median) firm size of repurchase firms is $2,466 ($354) million.
The average (median) B/M ratio is 0.496 (0.381), and average (median) free cash flow
ratio is 0.043 (0.091). During the period of the Internet bubble (1998–2000), the
volume of repurchases significantly increases, and repurchase firms are more likely to
be small firms. The right side of Table 1 presents the distribution of different types of
repurchases. As the previous studies, most repurchase samples are open market share
repurchases, which cover about 95% of our repurchase sample.
Figure 1 plots the sample distribution by the firms’ listing age. As the figure shows,
most repurchase announcements are authorized within 20 years of the IPO date, and
about 75% of repurchases are announced within 10 years of the IPO date. Generally
speaking, the volume of the repurchases decreases along with the listing age, with
many repurchases near the IPO date.

                         [TABLE 1 AND FIGURE 1 ABOUT HERE]

4.2 The Firm Characteristics in Life Cycle Stages
Next, we examine the relation between listing age and the other potential life cycle
variables to substantiate listing age as an appropriate proxy for the firm’s life cycle
stage. Table 2 shows the firm age, size, sales growth, ROA, and dividend-to-asset
ratios sorted by the listing age of the firm. Several observations are in order. First, on
average, firms need about 19 years from founding before going public. Quite
predictably, the firm’s age has a positive and significant relation with its listing age.
Moreover, firms with a lower listing age tend to be smaller in size, have higher sales
growth, and lower free cash flow than the firms with a higher listing age. These
results are consistent with the life cycle process.
Second, the positive relation between ROAs and listing age does not appear to support

10
   Control firms are identified on the basis of life cycle and industrial level because B/M ratio and free
cash flows change along with these bases. Usually, firms in early stage and/or firms in high technology
industry tend to have low B/M ratio.

                                                    7
the life cycle story because the high ROA represents a high level of investment
opportunities. However, Table 1 shows pre-event ROAs whereas investment
opportunity is usually linked to future profitability. Thus, this positive relation is not
inconsistent with the life cycle theory. Here, the dividend-to-asset ratio is unrelated to
the listing age, probably because the repurchase and dividend are substituted (Grullon
and Michaely, 2002). Third, firms with a lower listing age tend to have a smaller B/M
ratio than firms in the late stage, but this result is not significant.11 This pattern seems
to conform to the empirical finding that firms usually have a small B/M ratio around
the IPO date (Brav, Geczy, and Gompers, 2000). In short, Table 2 shows that these
characteristics of sample firms as sorted by listing age roughly conform to the
pattern of life cycle stages and thus support our use of listing age as a proxy for a
firm’s life cycle stage.

                                   [TABLE 2 ABOUT HERE]

4.3 The Ex Ante Motives for Repurchases
Next, we examine the abnormal B/M and abnormal free cash flow ratios to determine
the ex ante motives of the repurchases. By comparing the sample firms’ B/M and free
cash flow ratios with their nonrepurchase counterparts in a similar life cycle stage and
industrial level, we can examine how the repurchase motive relates to firms’ life cycle.
Table 3 presents the results of the abnormal B/M and abnormal free cash flow ratios
sorted by the listing age of the firm.

                                   [TABLE 3 ABOUT HERE]

Abnormal B/M ratios of repurchase firms are about 0.365 to 0.126 and significantly
positive within four years of the IPO date. Compared with the nonrepurchase industry
peers, these repurchase firms tend to be more undervalued (given B/M proxy for the
undervaluation). For more mature repurchase firms, the abnormal B/M ratios are
insignificant (and even negative at times) beginning from the seventh year of the IPO
date. Therefore, repurchase firms in early stage are prone to be undervalued, and
repurchase announcements are more likely to be authorized for the purpose of
information signaling. In an attempt to partition the sample carefully into early and
late stages, we use the fifth year as the threshold. Accordingly, the abnormal B/M is
significantly higher than that in late stage. The difference between the averages of
abnormal B/M ratios is significant at the 1% confident level. All these results are
consistent with H1a.
By contrast, the abnormal free cash flow ratios of repurchase firms become
significantly positive after the fifth year of the IPO date, falling in the range of 0.085
to 0.129. Hence, repurchase firms in a more mature stage tend to have more abnormal
free cash flows, and repurchases are more likely to be motivated by the purpose of
free cash flow disgorgement. Also, the average abnormal free cash flow ratio is
insignificantly negative in early stage but significantly positive in late stage. The
difference of abnormal free cash flow ratios in different stages is significant at 1%
confident level. These results are consistent with our H2a. Therefore, the abnormal
B/M and free cash flow implies that the motives for share repurchases appear to be

11
   This result, at first glance, may be easily misunderstood that repurchasing in early stage is not for
undervaluation because of smaller B/M ratio in early stage. However, the identification for motive of
repurchases should depend on the abnormal B/M ratio not B/M ratio because the B/M ratio change
along with the life cycle stage.

                                                   8
multiple and relate to the life cycle of the firm.

4.4 Robustness
4.4.1 Test for information asymmetry
According to our argument, firms in the early stage face more information asymmetry;
therefore, they have more incentive to buy back shares due to mispricing than firms in
the late stage. Yet whether the listing age relates to information asymmetry remains an
open question. To examine this relation, we conduct a robustness check to determine
whether the firms in the early stage suffer more serious asymmetric information
relative to the firms in the late stage. According to Jagannathan, and Stephens (2003),
earnings volatility can be used to examine the level of information asymmetry: Higher
earnings volatility means more uncertainty and more severe information asymmetry.
Empirically, we calculate the standard deviation of the ROA as the earnings volatility
for the five years before and the five years after the repurchase date. For repurchase
firms in the early stage, the standard deviations of ROAs are about 11.64 (9.18) before
the repurchase date (after the repurchase date). On the contrary, the standard
deviations of ROAs for repurchases in the late stage are 9.19 (7.67) before the
repurchase date (after the repurchase date). Statistically, the earnings volatility of
repurchase firms in the early stage is significantly higher than those in the late stage.

4.4.2 The alternative measure method for abnormal ratios
We reconsider the measure of abnormal B/M and free cash flow ratios by additionally
controlling for firm size because the previous literature often take size into account
(e.g., Ikenberry, Lakonishok and Vermaelen, 1995, for return matching; Eberhart,
Maxwell and Siddique, 2004, for profitability matching). In general, a large firm is
more mature and has a more stable sales growth rate. Specifically, we obtain the
median of the B/M of the matching firms with the same two-digit SIC code, the same
listing age, and the same size decile.12 Then, the abnormal B/M is calculated as the
sample firm’s B/M minus the median of the B/M for the newly defined matching
firms. Although not tabulated, the results are quantitatively similar to our main results.
That is, repurchase firms with a listing age less than five years have significant
positive abnormal B/M ratios whereas firms with a listing age of more than six years
experience significant positive abnormal free cash flow ratios. Consequently, this
alternative measure for abnormal B/M and free cash flow ratios provides the same
results.

4.4.3 Tender offering repurchases
Our sample consists of all types of share repurchases from the SDC database, yet it is
quite possible that our story is held only in the cases of open market share repurchases,
which account for nearly 95% of our sample. Tender offering share repurchases are
buyback programs with a commitment attached whereas open market share
repurchases include no commitment. As such, the market reaction to repurchase
announcements via tender offering would be stronger.
We examine the abnormal B/M and free cash flow for the subsample of tender
offering share repurchases. The unreported results are consistent with our previous
findings that repurchase firms with a lower listing age are accompanied by high
abnormal B/M ratios whereas repurchase firms with a higher listing age have high

12
    To be consistent with previous literature (e.g., Fama and French, 1992; 1993), we partition whole
listed firms into size deciles based on cutoff points of ten equal partitions for NYSE stocks.

                                                 9
abnormal free cash flow ratios. That is, our firm’s life cycle explanation still holds in
tender offering cases.

4.4.4 Measuring the firm’s life cycle by firm age
Next, we replace listing age with firm age, which is the time interval between the
founding day and the repurchase day, because it also fits the concept of the life cycle,
although we lose over 20% of the sample due to unavailable data. We compute the
abnormal B/M and abnormal free cash flow ratio by matching firm age rather than the
listing age in this examination.13 Table 4 presents the results of new abnormal B/M
and free cash flow ratios sorted by firm ages.

                                   [TABLE 4 ABOUT HERE]

Table 4 shows that firm age provides results similar to listing age. The results indicate
that young firms (i.e., less than 20 years old) tend to repurchase shares to signal
undervaluation as indicated by the significant positive abnormal B/M ratios (the ratio
range between 0.092 and 0.563). The average B/M ratio is also significantly higher in
the early stage than in late stage. In contrast, mature firms (i.e., more than 20 years old)
repurchase in tempt to distribute free cash flows as indicated by the significantly
positive abnormal free cash flow ratios (ratio range between 0.05 and 0.09). The
average abnormal free cash flow ratio for firms in early stage is lower than firms in
late stage. Although the difference is insignificant in two-tail test, the difference in the
one-tail test is marginally significant at the 10% confident level. Therefore, once again
the life-cycle scenario explains the multiple motives for share repurchases in terms of
firm age.

                           5. STOCK MARKET REACTION
We use the stock market’s reaction to investigate further whether the repurchase is
motivated by a firm’s life-cycle stage. Namely, we examine H1b and H2b by dividing
the sample into two groups: firms in the early stage and firms in the late stage.
According to this approach, we define an early stage (late stage) firm as a firm that
announces repurchases within (beyond) five years of its IPO date (i.e., five years of
the listing age is the threshold). Moreover, to consolidate the results, we examine both
short-term and long-term stock return regressions.

5.1 Short-Run Stock Market Reaction
In the short-term return regression, we regress the five-day abnormal return (five-day
AR) on abnormal B/M, abnormal free cash flow ratios, and control variables, which
include abnormal leverage, logarithm of size, open market share repurchase dummy,
and repurchase announced intended ratio. Log(size) is the logarithm of size at
previous month t–1, where month t is the month of announcement abnormal return.
Log(size) is used to control for the tendency of large firms to also be mature firms.
The dummy variable of open market share repurchase, OMR dummy, controls for any
potential difference between open market share repurchase and other types of
repurchases. Intended ratio is the initial announced repurchase ratio authorized by the
board of directors and is usually used to control for the size of the repurchase
program.
13
   In this subsection, the abnormal B/M is the B/M of the sample firm minus the B/M median of
matching firms controlled for the firm’s age in the same two-digit SIC industry. The abnormal free cash
flow is calculated in similar style.

                                                  10
We also control for abnormal leverage to measure the stock market reaction.
Abnormal leverage is measured as the sample firm’s leverage minus the median
leverage of the matching firms that have same listing age in the same two-digit SIC
industry.14 Chan, Ikenberry, and Lee (2004) simultaneously examine the B/M, free
cash flow, and leverage of repurchase firms to determine their motives. Moreover,
some studies (e.g., Ritter and Welch, 2002) argue that a firm with low leverage, which
it is usually in the early stage, may have incentive to repurchase shares or to issue
bonds to move toward to a target capital structure. Accordingly, the firm’s leverage is
related to the firm’s life cycle and therefore must be controlled.
Table 5 presents the empirical results of our short-term return regression. The
coefficients of Abnormal B/M are positive both in the early stage (coefficient = 0.0146,
t = 2.32) and the late stage (coefficient = 0.0052, t = 1.92). The two coefficient
estimations are statistically different, with a p-value less than 1% by the Wald test.
According to the signaling hypothesis, the initial abnormal return is higher around
repurchase announcements when the B/M ratio of repurchases is higher. Our result
indicates this positive reaction is particularly profound for repurchases in the early
stage and thus implies that repurchases in the early stage are likely to fit with the
signaling hypothesis.15 These results are consistent with H1b.

                                   [TABLE 5 ABOUT HERE]

The regression of the short-term return reaction does not show a significantly positive
coefficient for Abnormal free cash flow in both early stage and late stage. This result
does not seem to support our life-cycle hypothesis that repurchases in the late stage
are driven by excess free cash flow. In general, investors are relatively slow to
respond to changes in systematic risk (Berk, Green, and Naik, 1999), given that
repurchases for the free cash flow distribution purpose significantly reduce systematic
risk (Grullon and Michaely, 2004). Thus, we conjecture that this effect may come
from the delayed reaction of the market to the information. This argument is
corroborated by Grullon and Michaely (2004), who find that long-term market returns
increase with the declining cost of capital. To justify this presumption, we examine
the long-term market reaction and the abnormal B/M and abnormal free cash flow of
share repurchases.

5.2 Long-Run Stock Market Reaction
We use Fama and MacBeth’s (1973) cross-sectional regression to examine the impact
of abnormal B/M and abnormal free cash flow ratios on stock returns in a longer
horizon. The Fama–MacBeth approach is recommended because it makes the
long-term dependence problem less severe (Pontiff and Woodgate, 2008). For every
calendar month τ, we run a monthly return regression for stock returns that are
selected as the dependent variable if a stock had announced share repurchases in any
of the past four years. 16 Additionally, the regression incorporates three control
variables: Log(size), B/M, and prior return. Here, Log(size) is the logarithm of firm

14
   The leverage of the firm we measure is the sum of current liability (Compustat Item 5) and
long-term debt (Compustat Item 9) and then divided by total asset.
15
   We also do other regressions by excluding some of control variables to examine the abnormal B/M
and free cash flow ratios on initial announcement return. All these models appear the consistent result.
16
   We choose a four-year horizon because previous papers study the long run stock return of the share
repurchase in four years (e.g., Chan, Ikenberry, and Lee, 2004; Ikenberry, Lakonishok, and Vermaelen,
1995).

                                                  11
size measured at month τ–1. B/M is the book value of equity at previous fiscal year
end with at least a four-month lag to month τ , then divided by firm size. Prior return
is the prior 11-month buy-and-hold return by skipping one month to the month τ.17
Furthermore, to avoid the possible problem of long-term autocorrelation, we use
Newey and West’s (1987) heteroskedasticity autocorrelation standard errors to adjust
all the Fama–Macbeth regression coefficient estimations.
The results of the long-run market reaction are presented in Table 6. The coefficients
of Abnormal B/M are 0.0384 (t = 1.84) in the early stage and –0.0064 (t = –1.39) in
the late stage. These results imply that investors tend to react positively to repurchase
programs that are authorized during the early stage and are thus consistent with the
signaling hypothesis. In addition, the coefficients of Abnormal free cash flow are
0.0597 (t = 0.88) in early stage and 0.0432 (t = 1.81) in late stage. The coefficient in
the early stage is insignificant whereas the coefficient in the late stage is marginally
significant. To some extent, we find evidence supporting the notion that investors tend
to react more positively to repurchases with more abnormal free cash flow announced
in a firm’s late stage. By and large, the long-run return is more related to the extent of
the firm’s undervaluation (proxied by abnormal B/M) in the early stage but is also
associated with the magnitude of the free cash flow in the late stage. These results are
consistent with H1b and H2b and thus indicate that the firm’s life cycle provides an
explanation for the motives for repurchases.

                                   [TABLE 6 ABOUT HERE]

                                   6. CONCLUSION
This study investigates the differences in motives, characteristics, and market
return of shares repurchases in the growth stage versus shares repurchase in the
mature stage. We examine the abnormal B/M and free cash flow ratios of firms to
study ex ante motives for repurchases. Our results indicate that repurchase firms in the
early (late) stage tend to have a positive and higher abnormal B/M ratio (abnormal
free cash flow ratio) than repurchase firms in the late (early) stage. These findings
indicate that firms in the growth stage tend to announce repurchase to signal
undervalued stock. Conversely, firms in the mature stage are prone to buy back
shares for free cash flow disgorgement.
In attempt to verify further our life cycle hypothesis, we examine the market
reactions to repurchases by abnormal B/M and abnormal free cash flow ratios.
Empirically, the relation between the abnormal B/M ratio and the stock return for
repurchases in the early stage is significantly positive and higher than in the late stage.
On the contrary, the relation between the abnormal free cash flow ratio and the stock
return for repurchases in the late stage is significantly positive. Thus, this evidence of
market reactions corroborates that the motive for repurchases in the early (late)
stage is related to the signaling (free cash flow) hypothesis.




17
   We use the abnormal B/M, abnormal free cash flow, and abnormal leverage available at the
repurchase announcement month t, while size, B/M, and prior return are measured available at the
return formation month τ. The abnormal ratios including abnormal B/M, and free cash flow are
incorporated to test the motives of the share repurchase; nevertheless, the size, B/M, and prior return
are controlled for the return anomalies.

                                                  12
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                                          14
                                         Table 1
                        Summary Statistics and Sample Distribution

This table presents the summary statistics (in left big column) and the sample distribution (in right big
column). The sample of this paper consists of 4,285 repurchase announcements in U.S. during January
1990 to December 2006, where ADR, non-common stocks, and the repeated repurchase announcement
within one month are excluded. We require the availabilities from CRSP, Compustat and the initial
public offering (IPO) date information. N is the number of observations. Five-day AR (in %) is the
five-day (–2, +2) abnormal return (AR) that is the five-day buy-and-hold return of the sample firm
minus the five-day CRSP value-weighted index return. Intended ratio (in %) is the initial announced
repurchase ratio authorized by board of directors. Size (in million) is the market value of the firm that is
equal to the price multiplying the shares outstanding at the previous month end of the announcement
date. B/M is the book value of common equity (Compustat Item 60) at the previous fiscal year end the
repurchase date with at least four months accounting reporting lag, and then divided by Size. Free cash
flow is measured as

                   Free cash flow= (OI – IT + ΔDT – INTEX – PFD – DIV ) / SALE,

where OI is earnings-before-interest-tax-depreciation (EBITDA, Compustat Item 13), IT is income
taxes (Compustat Item 16), ΔDT is the change in deferred tax (Compustat Item 35), INTEX is interest
expense (Compustat Item 15), PFD is dividends for preferred stocks (Compustat Item 19), DIV is
dividends for common stocks (Compustat Item 21), and SALE is sales (Compustat Item 12). All these
variables for Free cash flow are measured at the previous fiscal year end of the repurchase date with at
least four months accounting reporting lag. The table reports the mean [medians] of the variables. All
variables are winsorized at top–bottom 1%. *** indicates the significant level for 1%. The sample
distribution describes the proportions of different types of repurchases, including open market share
repurchase (OMR), tender offering repurchase (Tender offer) and other types of repurchase (Others).

                                         Summary Statistics                               Sample Distribution
                          Five-day Intended                                                     Tender
                            AR       ratio           Size               Free cash   OMR          offer    Others
Period            N         (%)       (%)           (mil.)     B/M        flow       (%)         (%)       (%)
All            4,285       3.440*** 7.241          2,466       0.496      0.043      95           2             3
                         [1.715]*** [5.531]         [354]     [0.381]    [0.091]
1990–1997        952       3.143*** 7.052          1,014      0.480       0.044      92           3             5
                                   ***
                         [1.761]         [5.289]    [191]     [0.400]    [0.086]
                                   ***
1998–2000      1,477       3.916         7.756       945      0.519       0.044      96           2             3
                                   ***
                         [2.159]         [5.963]    [217]     [0.399]    [0.085]
                                   ***
2001–2006      1,856       3.216         6.929     4,419      0.486       0.043      96           2             2
                                   ***
                         [1.512]         [5.359]    [763]     [0.353]    [0.097]




                                                       15
                                             Table 2
                           Listing Age and Life-Cycle Related Variables

This table presents life cycle relating variables sorted by the listing age of the repurchase firm. Listing
age is defined as the time interval between the repurchase announcement date and the initial public
offering (IPO) date. N is the number of observations. Firm age is the time interval between the
repurchase year and the firm’s founding date. Size (in million) is the market value of the firm that is
equal to the price multiplying the shares outstanding at the month before the announcement date. B/M
is the book value of common equity (Compustat Item 60) and then divided by Size. Free cash flow ratio
is measured as

                        Free cash flow= (OI – IT + ΔDT – INTEX – PFD – DIV ) / SALE,

where OI is earnings-before-interest-tax-depreciation (EBITDA, Compustat Item 13), IT is income
taxes (Compustat Item 16), ΔDT is the change in deferred tax (Compustat Item 35), INTEX is interest
expense (Compustat Item 15), PFD is dividends for preferred stocks (Compustat Item 19), DIV is
dividends for common stocks (Compustat Item 21), and SALE is sales (Compustat Item 12). Sales
growth is the growth rate of sales prior to the announcement date. ROA is the EBITDA divided by total
assets (Compustat Item 6). DIV/TA is sum of the preferred and stock dividend (Compustat Item 19) and
common stock dividend (Compustat Item 21) and then divided by total assets. The variables from
Compustat are obtained at the previous fiscal year end of the repurchase date with at least four months
reporting lag. All these variables are winsorized at top–bottom 1%. Corr means the correlation
coefficient between Listing age and Firm age, Size, B/M, and so on. Numbers in the parentheses are
p-value. *** indicates the significant level for 1%.

Listing age                                                                       9 to
                  ≦1 yr 1 to 2 2 to 3 3 to 4 4 to 5 5 to 6 6 to 7 7 to 8 8 to 9          >10 yr Corr
                                                                                  10
N                  328     334   314    306   310    281    261    242    232     207    1470
                                                                                                        ***
Firm age           19      20     21    22     23     25     27     29     30     28      32    0.212
                                                                                                        ***
Size (in mil.)     650     536   653    911   893    1191 1178 1332 1467 1860 5252 0.248
                                                                                                        ***
Sales growth                                                                                    -0.17
                  1.695 1.488 1.245 1.270 1.238 1.213 1.159 1.189 1.169 1.139 1.125
                                                                                                 2
                                                                                                        ***
ROA               0.105 0.107 0.134 0.132 0.132 0.146 0.165 0.175 0.165 0.162 0.163 0.116
DIV/TA                                                                                          -0.00
                  0.024 0.011 0.003 0.002 0.004 0.003 0.007 0.003 0.004 0.006 0.008
                                                                                                 4
B/M               0.397 0.472 0.487 0.489 0.534 0.511 0.543 0.489 0.534 0.476 0.497 0.016
                                                                                                        ***
Free       cash
                  -0.198 -0.113 0.037 0.059 -0.035 0.084 0.106 0.123 0.123 0.103 0.07           0.07
flow




                                                     16
                                                                  Table 3
                             Abnormal B/M and Abnormal Free Cash Flow of Share Repurchase sorted by the Listing Age

This table presents averages of Abnormal B/M and Abnormal free cash flow of share repurchases sorted by the firm’s listing age. Listing age is defined as the time interval
between the repurchase announcement date and the initial public offering (IPO) date. B/M is the book value of common equity (Compustat Item 60) and then divided by Size.
Free cash flow is measured as

                                                        Free cash flow= (OI – IT + ΔDT – INTEX – PFD – DIV ) / SALE,

where OI is earnings-before-interest-tax-depreciation (EBITDA, Compustat Item 13), IT is income taxes (Compustat Item 16), ΔDT is the change in deferred tax (Compustat
Item 35), INTEX is interest expense (Compustat Item 15), PFD is dividends for preferred stocks (Compustat Item 19), DIV is dividends for common stocks (Compustat Item
21), and SALE is sales (Compustat Item 12). Abnormal B/M (Abnormal free cash flow) is the B/M (free cash flow) of the sample firm minus the median of B/Ms (free cash
flow ratios) of matching firms that are with the similar listing age within the same two-digit SIC industry. Early stage means the repurchase is announced within five years of
the IPO date (i.e., the listing age is less or equal to five years). Late stage means the repurchase is announced outside of five years of the IPO date (i.e., the listing age is more
than five years). The details of the calculation are described in the text. Numbers in the parentheses are t-statistics, and numbers in italic are number of observations.
Numbers being significant at the 10% confident level are highlighted in bold.

                                                                                                                                                         Early      Late
          Listing age              ≦1 yr      1 to 2     2 to 3    3 to 4     4 to 5     5 to 6     6 to 7    7 to 8     8 to 9    9 to 10    >10 yr                           Diff
                                                                                                                                                         stage      stage
                                   0.365      0.342      0.157     0.126     –0.032     –0.012     –0.075     –0.266    –0.128     –0.230     –0.305     0.196     –0.222     0.418
        Abnormal B/M
 (controlled for listing age and   (7.27)     (5.82)    (2.99)     (2.42)    (–0.52)    (–0.23)    (–1.30)   (–3.83)    (–1.84)    (–2.96)    (–8.67)    (7.83)    (–9.67)   (12.31)
            industry)
                                    327        334        314       305        310        281        261       242        232        207      1,288      1,590      2,511
                                   –0.188    –0.100      0.073     –0.005    –0.042      0.085      0.129     0.099      0.118      0.074     0.041     –0.042      0.071     –0.113
   Abnormal free cash flow
 (controlled for listing age and   (–1.81)   (–1.47)    (2.69)     (–0.09)   (–0.79)     (3.68)    (3.08)     (9.59)    (10.36)     (6.74)    (2.25)    (–1.57)     (6.58)   (–3.89)
            industry)
                                    172        283        270       267        263        238        228       211        212        183       1131      1,255      2,203




                                                                                         17
                                                                     Table 4
                                  Abnormal B/M and Abnormal Free Cash Flow of Share Repurchase Sorted by Firm Age

This table presents averages of abnormal B/M and abnormal free cash flow of share repurchases sorted by the firm age. Firm age is defined as the time interval between the
repurchase year and the corporate founding year. B/M is the book value of common equity (Compustat Item 60) and then divided by Size. Free cash flow is measured as

                                                        Free cash flow= (OI – IT + ΔDT – INTEX – PFD – DIV ) / SALE,

where OI is earnings-before-interest-tax-depreciation (EBITDA, Compustat Item 13), IT is income taxes (Compustat Item 16), ΔDT is the change in deferred tax (Compustat
Item 35), INTEX is interest expense (Compustat Item 15), PFD is dividends for preferred stocks (Compustat Item 19), DIV is dividends for common stocks (Compustat Item
21), and SALE is sales (Compustat Item 12). Abnormal B/M (Abnormal free cash flow) is the B/M (free cash flow) of the sample firm minus the median of B/Ms (free cash
flow ratios) of matching firms that are with the similar firm’s age within the same two-digit SIC industry. Early stage means the repurchase is announced within 20 years of
the founding date (i.e., the firm age is less or equal to 20 years). Late stage means the repurchase is announced outside of 20 years of the founding date (i.e., the firm age is
more than 20 years). The details of the calculation are described in the text. Numbers in the parentheses are t-statistics, and numbers in italic are number of observations.
Numbers being significant at the 10% confident level are highlighted in bold.

            Firm age                ≦5 yr     5 to 10     10 to 15   15 to 20     20 to 25    25 to 30    30 to 40    40 to 50     >50 yr     Early stage Late stage     Diff

                                     0.563    0.347        0.081       0.092      –0.022       0.002       –0.101      –0.314      –0.795       0.201       –0.164      0.365
         Abnormal B/M
   (controlled for firm age and      (5.48)   (8.02)       (1.88)     (2.87)      (–0.56)      (0.03)     (–1.13)      (–2.22)     (–5.70)      (8.37)     (–4.79)      (8.73)
             industry)
                                      175      508          722         639         444         275         233          102         214        2,044       1,268

                                    –0.013    –0.015       0.082       0.034       0.082       0.048       –0.033       0.048       0.092       0.013       0.047       –0.047
    Abnormal free cash flow
   (controlled for firm age and     (–0.13)   (–0.28)      (3.43)     (1.15)       (9.67)      (5.32)     (–0.51)      (3.76)       (3.17)      (0.65)      (3.85)      (–1.44)
             industry)
                                      120      393          594         536         364         238         196          84          170        1,643       1,052




                                                                                       18
                                      Table 5
                 Repurchase Announcement Abnormal Return Regression

This table presents the repurchase announcement abnormal return regression. The dependent variable is
the five-day announcement abnormal return that equals five-day buy-and-hold return of the sample
firm minus the five-day CRSP value-weighted index return. Early stage means the repurchase is
announced within five years of the initial public offering date (i.e., the listing age is less or equal to five
years). Late stage means the repurchase is announced outside of five years of the initial public offering
date (i.e., the listing age is more than five years). B/M is the book value of common equity (Compustat
Item 60) and then divided by Size. Free cash flow is measured as

                    Free cash flow= (OI – IT + ΔDT – INTEX – PFD – DIV ) / SALE,

where OI is earnings-before-interest-tax-depreciation (EBITDA, Compustat Item 13), IT is income
taxes (Compustat Item 16), ΔDT is the change in deferred tax (Compustat Item 35), INTEX is interest
expense (Compustat Item 15), PFD is dividends for preferred stocks (Compustat Item 19), DIV is
dividends for common stocks (Compustat Item 21), and SALE is sales (Compustat Item 12). Leverage
is the sum of current liability (Compustat Item 5) and long term debt (Compustat Item 9) and then
divided by total asset. Abnormal B/M is the B/M of the sample firm minus the median of B/Ms of
matching firms that are with the similar listing age within the same two-digit SIC industry. Abnormal
free cash flow and Abnormal leverage are calculated in similar fashion. Abnormal B/M, Abnormal free
cash flow and Abnormal leverage are measured at the previous fiscal year end of the repurchase date
with at least four months accounting reporting lag. The details of these calculations are described in the
text. Log(Size) is the logarithm of market value of the firm that is equal to the price multiplying the
shares outstanding at the previous month end of the announcement date. OMR dummy is equal to one if
the repurchase is an open market share repurchase, and zero otherwise. Intended ratio is the initial
announced repurchase ratio authorized by board of directors. Year dummies are incorporated but
coefficients are not presented. Numbers in the parentheses are t-statistics. Numbers being significant at
the 10% confident level are highlighted in bold.

Dep. var. five-day AR                                       Early stage                   Late stage
Intercept                                                      0.4072                        0.1584
                                                              (6.15)                        (5.12)
Abnormal B/M                                                    0.0146                        0.0052
                                                               (2.32)                        (1.92)
Abnormal free cash flow                                         0.0037                       –0.0041
                                                               (0.63)                       (–0.69)
Abnormal leverage                                               0.0249                        0.0233
                                                               (0.99)                        (1.60)
Log(size)                                                     –0.0264                        –0.0092
                                                             (–6.69)                        (–5.17)
OMR dummy                                                     –0.0295                        –0.0129
                                                             (–1.21)                        (–0.85)
Intended ratio                                                  0.0009                        0.0016
                                                               (1.22)                        (3.43)
Year dummies                                                    Yes                           Yes
Adj. R2                                                         0.0556                        0.0289




                                                      19
                                        Table 6
                           Fama and MacBeth Regression Analysis

This table presents the Fama and MacBeth (1973) regression. The dependent variable is the monthly
raw return. For every calendar month τ, we include the stocks that had the repurchase announcement
(made in year t) in any of past 48 months into the cross sectional regression. We regress the monthly
return against independent variables every calendar month, and the Fama–MacBeth estimation is the
time-series averages and t-statistics are obtained based on the time-series volatility. ‘Early stage’ means
the repurchase is announced within five years of the IPO date (i.e., the listing age is less or equal to five
years). ‘Late stage’ means the repurchase is announced outside of five years of the IPO date (i.e., the
listing age is more than five years). B/M is the book value of common equity (Compustat Item 60) and
then divided by Size. Free cash flow is measured as

                    Free cash flow= (OI – IT + ΔDT – INTEX – PFD – DIV ) / SALE,

where OI is earnings-before-interest-tax-depreciation (EBITDA, Compustat Item 13), IT is income
taxes (Compustat Item 16), ΔDT is the change in deferred tax (Compustat Item 35), INTEX is interest
expense (Compustat Item 15), PFD is dividends for preferred stocks (Compustat Item 19), DIV is
dividends for common stocks (Compustat Item 21), and SALE is sales (Compustat Item 12). Leverage
is the sum of current liability (Compustat Item 5) and long term debt (Compustat Item 9) and then
divided by total asset. Abnormal B/M is the B/M of the sample firm minus the median of B/Ms of
matching firms that are with the similar listing age within the same two-digit SIC industry. Abnormal
free cash flow and Abnormal leverage are calculated in similar fashion. Abnormal B/M, Abnormal free
cash flow and Abnormal leverage are measured at the previous fiscal year end of the repurchase year t
with at least four months accounting reporting lag. The details of these calculations are described in the
text. Log(Size) is the logarithm of market value of the firm that is equal to the price multiplying the
shares outstanding at moth τ–1. B/M is measured at the previous fiscal year end of month τ with at least
four-month reporting lag. Prior return is past 11-monthly buy-and-hold raw return (by skipping one
month between the prior return formation and the dependent variable) from month τ–12 to month τ–2.
OMR dummy is equal to one if the repurchase is an open market share repurchase, and zero otherwise.
Intended ratio is the announced repurchase ratio authorized by board of directors. Numbers in the
parentheses are t-statistics with Newey and West (1987) heteroskedasticity-autocorrelation adjustments.
Numbers being significant at the 10% confident level are highlighted in bold.

Dep. var. monthly return                                   Early stage                   Late stage
Intercept                                                    –0.2259                        0.0253
                                                            (–1.37)                        (3.06)
Abnormal B/M                                                   0.0384                      –0.0064
                                                              (1.84)                      (–1.39)
Abnormal free cash flow                                        0.0597                       0.0432
                                                              (0.88)                       (1.81)
Abnormal leverage                                            –0.3246                        0.0150
                                                            (–1.61)                        (1.82)
Log(size)                                                      0.0144                      –0.0016
                                                              (1.42)                      (–2.06)
B/M                                                          –0.0344                        0.0238
                                                            (–1.79)                        (2.00)
Prior return                                                   0.0010                       0.0070
                                                              (0.57)                       (1.28)
OMR dummy                                                      0.0027                       0.0013
                                                              (2.90)                       (1.61)
Intended ratio                                                 0.0025                      –0.0149
                                                              (0.40)                      (–1.75)
Adj. R2                                                       0.2809                        0.2776


                                                     21
     400

     350

     300

     250


 N   200

     150

     100

      50

       0
           1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
                                                   Listing age (Year)



Figure 1 Sample Distribution by the Listing Age of Repurchase Firms

This figure plots the volume of repurchases by listing age of the firm. Listing age is the time interval
between the repurchase announcement date and the initial public offering (IPO) date. One year means
the listing age less than (or equal to) one year. N is the number of repurchases.




                                                   21

				
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