Story Buybacks Yield Substantial Return on Investments

Contact: Winston Derden
Phone: (713) 831-4793

Stock Buybacks Yield Substantial Return on Investments

Documenting a strong trend in current trading on Wall
Street, research by a Rice business professor indicates that
corporate stock repurchases may be the key to investment returns
that are significantly higher than the market average.

A recent study by David Ikenberry, an assistant professor in the
Jesse H. Jones Graduate School of Administration, said investments
in firms reacquiring their own stock on the open market can reward
investors with returns of as much as 45 percent above average market
performance over a four-year period.

"What is significant in this research," Ikenberry said, "is that
the market is surprisingly slow to respond to the announcement of
many stock buybacks. Because of this substantial delay in the market
response, there is a significant time for investors to buy
undervalued stocks that will tend to an increase in value over the
next four years."

Ikenberry’s research is presented in a working paper entitled"Market Underreaction to Open Market Share Repurchases." The working
paper was produced in collaboration with Josef Lakonishok of the
University of Illinois at Urbana–Champaign and Theo Vermaelen of
INSEAD, a French business institute.

One surprising finding of the research is that a buyback can be
a positive signal about a company, but it is not immediately seen
that way in the market. For example, Ikenberry said his research
shows that an average response to the announcement of an open market
stock repurchase only increases the price of the stock by 3.5
percent. However, over a four-year period, investors who bought and
held stock that had been announced for repurchase realized gains on
average of more than 12 percent above the gains of stocks in a
control portfolio. For value stocks, the average gain was more than
45 percent over four years.

The research is based on an extensive sample of 1,239 firms that
announced between 1980 and 1990 that they would repurchase their own
stock on the open market. All the companies in the sample are traded
on the New York Stock Exchange (NYSE), the American Stock Exchange
(ASE) or the NASDAQ exchange.

Currently, dollar volume in stock buybacks is outpacing
investments in initial public offerings (IPOs) by approximately
three to one. Projections for 1994 indicate that stock buybacks
could reach $50 billion, the second highest total in a decade.

Some major companies that have announced stock buybacks recently
are NationsBank, Bank One, Merrill Lynch, Pfizer and Cray Research.
At the beginning of the month, Philip Morris announced a massive $6
billion repurchase of its shares.

Ikenberry can be reached at his Rice office at 285-5385. Copies
of the working paper "Market Underreaction to Open Market Share
Repurchases" is available by writing David Ikenberry at the Jesse H.
Jones Graduate School of Administration, Rice University, P.O. Box
1892, Houston, Texas 77251.

Rice University is an independent, coeducational, nonsectarian
private university dedicated to undergraduate teaching and graduate
studies, research and professional training in selected disciplines.
It has an undergraduate population of 2,674, a graduate and
professional student population of 1,449, and a full-time faculty of
437.

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