• Total Factor Productivity Following Share Repurchase Announcements

Abstract

This study investigates the motives behind share repurchase by examining the operating performance of firms in the literature related to this issue. However, a consensus on the effectiveness of share repurchase has yet to be reached: outperformance, underperformance, and maintenance of the operating performance of repurchasing firms have been observed. Thus, from this perspective, the motives behind repurchase remain unclear. Unlike previous studies examining return-on-assets, this paper uses total factor productivity, an important measure for operating performance in economics, to test the signaling against free cash flow disgorgement explanation. Our results suggest that the total factor productivity of repurchasing firms improves following the announcement date. Consequently, our results are more consistent with the signaling hypothesis in which a share repurchase program conveys information regarding the improved prospects of the firm.

Keywords: Repurchase, Total Factor Productivity, Signaling Hypothesis