Share Repurchases, Risk, and Underpricing

Abstract

This paper analyzes changes in firms' cash flows and discount rates around share repurchase announcements. Both cash flow and discount rate volatility decrease significantly after repurchase announcements. The decrease in volatility is smallest for firms that are likely to be underpriced and that experience the highest initial market reactions and long-term returns after the announcement. Firms with the largest decrease in volatility do not experience significantly positive long-term returns. Moreover, the level of the discount rate decreases from one quarter before until up to three years after the repurchase announcement for firms that are likely to be underpriced. The findings suggest that financial market participants learn about firms' systematic risk when firms announce share repurchases.