The Effect of Open Market Repurchase on Company s Value

Transcription

1 The Effec of Open Marke Repurchase on Company s Value Xu Fengju Wang Feng School of Managemen, Wuhan Universiy of Technology, Wuhan, P.R.China, 437 ( xfju@63.com, wangf9@63.com) Absrac This paper invesigaes on nine lised Companies in Shanghai and Shenzhen sock markes ha have implemened he Open Marke Repurchase (OMR) program. In his research, he even sudy mehod is employed o analyze he effec of he OMR on he Companies value. A las he paper finds he rule of effec of OMR on lised company s value, and indicaes ha he effec needs a long-erm process of gradual release. Key words capial marke, share repurchase, oen marke repurchase, vlue of company Inroducion Share Repurchase as an imporan financial insrumen of capial operaion is very popular in maure capial marke. However, in Chinese sock marke here are very few share repurchase, especially he Open Marke Repurchase. Since May 25 he China Securiies Regulaory Commission publicized he Lised Companies repurchase shares o he public managemen mehods (Trial). In December 27, here are only a oal of 9 lised companies announcing OMR. Allowing lised companies repurchase ousanding shares from he legal level as a long-erm building of sysem is conducive o sabilizing he sock marke, achieves a reasonable reurn of he company s value, and resores he confidence of invesors []. A he same ime, i also provides a flexible means of capial operaion for hose lised companies who wan o improve he capial srucure by share repurchase. Whereas he share repurchase will bring wha kind of impac on he value of company, his paper is proposed o discuss i hrough empirical analysis. 2 Theoreical Background 2. OMR Theory The Open Marke Repurchase means he company repurchases a cerain number or range limi of he company s ousanding shares wih a marke price no exceeding an upper limi and a a cerain ime period in he secondary marke. Because he OMR gives more decision-making righs o company managers, i has become a major form of repurchase. The daa from he Unied Sae show ha: from 994 o 999, wih he relaxaion of conrol and he diversiy of repurchase moives, he OMR accouns for 95% o 98%, he Tender offers only occupy % o.5%, and Duch aucions is he 3% o 7% of all share repurchases [2]. This paern has no changed nowadays. 2.2 Value of Company The value of company is he presen value of he company s fuure cash flows. I depends on he profiabiliy of he company s asses and also is he foundaion for forming he basis of sock price. The common mehods for evaluaing he company s value are he Discouned Cash Flow (as DCF), Price/Earning (as PE), and Price/Book Value (as PB), which assess wheher he value of sock is undervalued in sock marke [3]. Once he company s value has been underesimaed, he invesmen opporuniies o his company is greaer, as well as he probabiliy of repurchase. Because i will no only bring losses o he company and is shareholders, bu also o he managers, even hreaen he jobs of managers. So he value underesimae is he fundamenal reason and underlying moivaion of sock repurchase, and is he saring poin of sudying he sock repurchase. 3 Sample of Research 3. The Sample of Lised Companies Afer he Lised Companies repurchase shares o he public managemen mehods (Trial) was announced in May 25, here are only 9 companies adoping OMR in Shanghai and Shenzhen sock markes. This paper will regard all of hose lised companies as sudy objecs. Their repurchase programs are summarized in Table. 747

2 Table The repurchase programs of lised companies Companies full name Shor Price Premium Proporion Funds name (yuan/uni) (%) (%) (million) HADA IRO & STEEL HDIS HUA VALI STEEL TUBE & WIRE CO., LTD. HLTW SHE YAG IGEIOUS DEVELOPMET A HUI SHA YIG PAPER IDUSTRY IGI SYPI HUADIA EERGY HDECL ZHE JIAG HUA HAI PHARMACEUTICAL HHPH JIU ZHI TAG CO., LTD. JZT JIAG SU SUSHIE JSSS ZHEG ZHOU YUTOG BUS CO., LTD. YTCO Descripive Saisics I evaluaes he lised companies value by using he mehods of DCF, PE and PB. The able below shows he value evaluaion resul of he companies shows ha he highes proporion of he sock price below he DCF valuaion is % of HLTW, he lowes is -.5% of YTCO, he average of sock price below DCF valuaion is -7.5%. The values of hose companies are below heir real values from he DCF valuaion. The highes of PE below he indusrial average is -6.48% of YTCO, he lowes is % of JSSS, and he average level is 33.5%. There only are he values of HDIS, HDECL and JSSS no underesimaed, and he values of oher companies are underesimaed from he PE level. The highes of PB below he indusrial average is % of HHPH and JZT, he lowes is 43.79% of YTCO, he average level is %. The values of all he companies excep YTCO are undervalued from he PB level. All of he resuls indicae ha he values of hose companies who announced he OMR programs are below heir real values. Table2 alue evaluaion of sample Companies name DCF Sock price valuaion (yuan/uni yuan/uni Underesi maed proporio n (%) PE PE of indusri al average PE Underes imaed propori on % PB PB of indusri al average PB Underesim aed proporion % HDIS % % % HLTW % % % IGI % % SYPI % % % HDECL % % % HHPH % % % JZT % % % JSSS % % YTCO % % % Average -7.5% 33.5% % 4 Mehodology of he Research To es he effec of OMR on hose lised companies values, he paper employs he Even Sudy. This mehod is helpful o find ou wheher here is abnormal sock price effec linking he no expeced specific evens. 748

3 In order o esimae he abnormal yield of sock in he period of OMR, i needs o esimae he normal yield firsly. The so-called normal yield is he expeced rae of reurn when he even does no happen. This paper chooses he corresponding indusry s index as a sock s expeced yield ( µ i ). The abnormal yield ( AR i ) is defined as he difference beween he real rae of reurn ( R i ) and expeced yield ( µ i ) [4]. To ge he all effec of OMR even, he abnormal yield can be accumulaed along he wo-dimensional pah: he ime pah and single sock pah. The model is following: 2 AAR = AR i () Var( AAR ) = S i (2) 2 i= i= AAR µ = 2 S AAR ~ (, Var( AAR )) (3) (4) α p The saisical es adops es of wo-ailed, so comparing 2 and 2, all he saisics are calculaed by SPSS auomaically. The significan level (α ) is given as.5, and compared wih he probabiliy of es measures ( p ). If p is less han α, hen i should refuse H, and here is a significan difference beween he overall average and he es. Conversely if p is greaer hanα, i should no refuse H, here is no significan difference beween he overall average and he es [5]. 5 Analysis This sudy invesigaes on all he 9 lised companies above-menioned. In order o research he reacion of sock price afer he repurchase program, i is divided ino differen ime period for reveal he differen reacion of sock price in he shor-erm, medium-erm and long-erm. The delineaion of he specific ime is in Table 3. Table 3 Time Period of Sock Price Even Time period Base price Sock price Even window Day Announce-day and a week A daily closing price before [], [- ], Daily closing price before and afer i [-2 +2]day A monh afer A quarer afer Half year afer A year afer A weekly closing price before A monhly closing price before A monhly closing price before A monhly closing price before weekly closing price monhly closing price monhly closing price monhly closing price d Week [ +3]week w [,+2]monh m [ m +5]monh m [ +]monh The calculaed resuls are showed in Table4, which describes he accumulaed abnormal yields in differen ime periods. 749

4 Table 4 Accumulaed Abnormal Yields in Differen Time Periods The resuls Accumulaed Accumulaed Accumulaed Accumulaed Accumulaed Abnormal abnormal abnormal abnormal abnormal abnormal yield in yields in [-2, yields in yields in yields in yields in [, [] day +2] day [,+2] week [,+2] monh [,+5] monh +] monh Minimum Maximum Average Sandard deviaion T-saisics probabiliy of wo ailed P % Min Confidence inerval Max Table 4 shows ha he abnormal yield of a week before and afer Announce-day has no respond, he maximum is 4.4%, he minimum is -2.6%, he average is.9%, he sandard deviaion is.2, T=.5, P.283, so p >α, i should no refuse H, here is no significan difference beween he overall average and he es. The no effec in and a week before and afer i explain ha he repurchase has no been paid enough aenion in sock marke. The main reasons may are he repurchase share is new hings in China and he marke is bear marke. The shor-erm effec of sock price includes he abnormal yields in a monh and a quarer afer s. From able 5 p is greaer hanα, so i should no refuse H. There are marke reacions in a monh and a quarer afer s, and i has a gradually upward rend. Because he sock marke has begun o improve, and he invesors have begun o learn he shares repurchase. Afer a quarer he accumulaed abnormal yield is relaively significan. The medium-erm effec of sock price is explained by he abnormal yield in half year afer. I shows ha he marke reacs o he repurchase coninually, and he upward rend is more significan. On one hand he share-rading reform has sared, and he sock marke furher improved, on he oher hand he invesors have a beer undersanding of he share repurchase and hose companies values. Unil o half a year, he accumulaed abnormal yield is very significan and he difference of effec is increasing. The long-erm effec of sock price is described by he abnormal yield in a year afer. The marke reacs o he repurchase coninually like he medium-erm effec. A his ime he share-rading reform has sared compleely, and he sock marke eners a new round of bull marke. The significan accumulaed abnormal yields indicae hose companies announcing OMR do have invesmen value. Then i compares he assessmen value, repurchase premium and effec of sock price. The accumulaed abnormal yield of he whole year afer he repurchase share program announced is in he rend Figure. The accumulaed abnormal yield is increasing wih he ime passed. In he half of a year i has exceeded he average of repurchase premium (3.9%), and afer a year i is very close o PE slip (33.5%). Figure The Trend of Accumulaed Abnormal Yield 75

5 The paper has carried an empirical sudy abou he abnormal yield hrough Even Sudy, and explains he effec of OMR on he shor-erm, medium-erm and long-erm sock prices of hose 9 lised companies. The average of accumulaed abnormal yield of quarer is 2.7% and he average of accumulaed abnormal yield of year is 25%, which indicae ha he OMR has a weak shor-erm effec and a srong long-erm effec on sock price in he Shanghai and Shenzhen sock markes. The reacion of sock price o he OMR has a long-erm process for gradual release. 6 Conclusions The effec of OMR on lised company s value has a long-erm process of gradual release. The values of all he lised companies who announced he OMR programs in Shanghai and Shenzhen sock markes are underesimaed, and improving he sock price is heir mos fundamenal moivaion of adoping OMR. Because of oo few samples and he volailiy of Chinese capial marke, he finding of his paper needs o be furher examined. Alhough here are only 9 cases, some of he reacions of sock price are over-reac, some of hem are lack of reacions, and mos of hem are long-erm reacions. These phenomena can no be sudied by using he classic mehod of economics, bu i should use he modern behavioral economics o conduc research. References [] Allen, F. Michaely. Payou Policy [M]. Handbooks of Economics of Finance, 23:-2 [2] Grullon, G. R. Michaely. Dividends, Share Repurchases, and he Subsiuion Hypohesis [J]. Journal of Finance, 26(57): [3] Ikenberry, D. Vermaelen, T. The Opion o Repurchase Sock [J]. Financial Managemen, 23(25): 9-24 [4] Ikenberry, D. Lakonishok, J. Vermaelen,. Sock Repurchases in Canada Performance and Sraegic Trading [J]. Journal of Finance, 2(55): [5] Wansley, J. W. Lane, W. R. Changing Moives for Share Repurchases [M]. McGraw-Hill, 26: