Operating Performance and Investment Expenditures Following Open Market Share Repurchases

We examine long-term operating performance and investment expenditures following open market share repurchase announcements between August 2000 and December 2003 by firms whose shares traded on the Taiwan Stock Exchange (TSE) or OTC market. We find that repurchasing firms experience significant abnormal declines in operating performance relative to non-repurchasing firms in the year preceding the event. Further, we do not find any evidence that our sample firms outperform the matching firms in the 4 years following the announcement of the share repurchase programs. Our findings do not support the idea that share repurchases signal an improvement in future operating performance. With respect to the investment expenditures, our empirical results indicate that repurchasing firms do not invest more than their industry peers after the repurchase announcement, which tends to support the prediction of the free cash flow hypothesis. However, we find no evidence that firms reduce their cash reserves after the share repurchase announcements. Overall, this study provides limited evidence to support for the free cash flow hypothesis.