The buyback anomaly and using the undervaluation index on the Johannesburg Stock Exchange

Gordon, Matthew

The buyback anomaly and using the undervaluation index on the Johannesburg Stock Exchange

Thesis / Dissertation

2023

Abstract

The focus of this study is to add to the available literature on whether companies listed on the Johannesburg Stock Exchange (JSE) deliver persistent long-term excess returns following the announcement of an open market share repurchase. 454 share repurchases across 160 companies were included in the total sample over the period January 2003 to December 2021. Using event study methodology, the buyback anomaly survives the recently developed Fama and French five-factor model: open market share repurchase announcements are followed by statistically significant positive long-term excess returns. Cumulative abnormal average returns (CAARs) of 7.07% and 22.70% were realised after 250 and 720 trading days post- announcement, respectively. The results are consistent with signalling theory and indicate an informationally inefficient market. Furthermore, Peyer and Vermaelen's Undervaluation Index (U-Index) was effective in identifying highly undervalued companies at the time of their respective share repurchase announcements within the total sample. Compared to companies with low to moderate undervaluation scores, companies with high undervaluation scores generated an additional 9.47% after 250 trading days, and 3.57% after 720 trading days within their respective samples. The U-Index improves the predictability of excess returns after an open market share repurchase announcement by companies listed on the JSE. This study makes a significant contribution to the current understanding of long-term excess returns of shares following a share repurchase announcement in South Africa. Furthermore, this study also serves as a test of market efficiency on the JSE and finds that the U-Index offers additional practical application by enhancing various share repurchase related trading strategies. Opportunities for future research on this topic include testing the relationship between positive long-term excess returns and idiosyncratic volatility and combining volatility with Peyer and Vermaelen's undervaluation predictors.

Keywords

Finance and Tax

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Masters

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