Costly signal in Open market repurchase: Evidence in Thailand

Abstract

Several studies argue that open market share repurchase has the lowest power to signal the inside information to the market. In this study I explore the market reaction to the announcement of stock repurchase plan with the firm’s characters argued in prior literature that they can increase the market confident. Referred from prior literatures, the stated motivation in the press release, insider “BUY” prior announcement, percentage of majority shareholder, and the amount of repurchasing plan are introduced to reflect the level of information signal sent by management. I find that investors have skepticism with an information sent via open market share repurchase. I also find that the cost of stated motivation, Insider transaction before announcement, percentage of majority shareholder, and the amount of repurchasing plan is not high enough to differentiate good firm from bad firm. In addition, I find that information that release by repurchasing firm at announcement unable to predict the actual action of the firm. The result aligns with previous literatures that since the cost of share repurchase via open market is low and the penalty of not following the word is low, repurchasing firms are indifferent whether they should follow the word or not. The conclusion from this research is that open market share repurchase is not a useful method to signal information to the market. Investors also should not always see a repurchase announcement as good news since there is a high downside risk.