Stock Repurchases Around the 2015-16 Chinese Stock Market Crash

Abstract

I examine the market reactions to the release of a circular by the China Securities Regulatory Commission (CSRC) around the Chinese stock market crash in 2015 to encourage under-valued firms to conduct open-market share repurchases. I find that the average cumulative abnormal return of under-valued firms is 7.54% higher than that of over-valued firms in a three-day (-1, +1) window around the event day when the Circular is released. Those gains of under-valued firms gradually reverse during the next 29 trading days as they did not follow the Circular to repurchase shares as expected. Even though the Circular did not manage to encourage many under-valued firms to repurchased shares, many more firms repurchased shares between June 2015 and March 2017. I study the stock price reactions to these 52 openmarket share repurchase announcements during this period. The average cumulative abnormal return in the three-day event window around the board announcements is 6.3%. But I do not find any significant long-term abnormal returns in one year following the repurchase announcements. The market reacts differently to different types of share repurchases. Firms announce share repurchases to reduce capital on average gain 7% more than those to implement employee stock ownership plans. Share repurchases do not seem to be motivated by undervaluation, agency costs or earnings management. It is likely that these open-market repurchases are conducted to take advantage of the CSRC Circular to artificially support their stock prices in the short run. As a result, repurchasing firms are observed to buy back their shares on the costs of the capital expenditures.