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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Share Repurchase Programs in Switzerland: Different Buyback Methods and Market Reaction
Organization Unit
Authors
  • Louis L. Lehmann
Supervisors
  • Diego Ostinelli
  • Michel Habib
Language
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 50
Date 2016
Abstract Text The purpose of this thesis is to investigate whether Swiss share buyback programs carried through different repurchasing methods lead to a different market reaction. The Swiss framework is unique due to the scope of methods firms can choose from as well as their peculiarities created by the regulatory environment and the tax treatment of buyback programs. In Switzerland, firms can choose from five different methods to publicly repurchase shares. This study investigates the market reaction to share buyback programs using a second trading line, open market transactions, transferable put rights, and fixed price tender offer. Switzerland's fiscal and regulatory environment are reviewed thoroughly as it has been shown that they impact both the repurchase activity as well as the market reaction. Furthermore, the peculiarities of the framework may induce bias in the way firms choose their repurchasing method. Many previous studies find positive abnormal return around the announcement date as well as long-term abnormal return. Various hypotheses regarding firms' motives are reviewed and the expectations regarding the market reaction are built on each method's features. Using the database from the regulatory body of share repurchase programs (the Swiss takeover board), information regarding public announcements of buyback programs is collected to create a sample of 287 share buybacks announced between December 5, 1997, to November 11, 2015. In order to measure the market reaction to different methods, both a short and long-term event study are performed on the whole sample and subsamples clustered by methods. The short-term event study is implemented using cumulative average abnormal returns (CAAR) on an eleven trading days event window (-5;5) calculated with both a mean adjusted return model and a market model for robustness. The second trading line is the only method with significant positive abnormal return of 0.91\%, fixed price tender offer display slightly non-significant negative abnormal return (-0.64\%) whereas, open market transactions and transferable put rights are non-significantly positive (0.58\% and 1.95\% respectively). When compared to previous studies in the US, abnormal returns are relatively smaller, moreover, these results are contrasted as this study suffers from small sample bias. While the second trading line is the most popular method with 68\% of total share repurchase announcements, open-market, transferable put rights and fixed price tender offer account for 13\%, 10\% and 9\% respectively. Hence, the number of observations for these methods drops significantly. Preliminary results support the validity of the option value hypothesis for programs carried out through the second trading line. The announcements' cumulative abnormal returns are then regressed on repurchase characteristics contained in the announcement exclusively (the percentage of shares sought, the premium offered if available, and the rationale as stated in the announcement disclosure document). Contradicting previous research, the percentage of equity targeted has either a non-significant relationship with programs carried at market price (second trading line and open market) and a significant negative relationship with programs at fixed price (transferable put rights and fixed price tender offer). When capital structure optimization is stated as a motive to repurchase, the relationship is significantly positive only on the second trading line cumulative abnormal return and all the share repurchase programs irrelevant of the method. On the other hand, there is a significant positive relationship for open market programs stating price stabilization and undervaluation as a rationale. The long-term event study is implemented using average buy and hold abnormal returns as this method is said to resembles the most investors' experience. The returns are computed over 36 months from the month following the share repurchase announcement. Second trading line, fixed price and open market method exhibit significant positive abnormal return, 11\%, 21\% and 12\% respectively. Thus confirming the market underreaction to share repurchase announcements. Programs executed through transferable put rights have on average significant negative abnormal return of -13\%, this result is unexpected and is not consistent with the beliefs formed in the literature review. To conclude the analysis, share repurchase activity is regressed on the stock market using a logit model. I find that firms are more likely to buyback when the market is high in absolute terms but below the index 200 trading days moving average, it indicates that undervaluation is a consistent hypothesis to explain repurchase activity. This research needs to be completed by further studies as it fails to assess whether the abnormal returns are the consequences of characteristics that are not contained in the share buyback program announcement's press release such as firms' size, market to book ratios, cash holdings, capital structure, and compensation plans which may have a better explanatory power.
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