Abstract:
Using 234 open-market share repurchase announcements in China from June 2005 to March 2018, I investigate whether insiders in the repurchasing firms are able to make a profit for themselves, and whether politically connected firms are able to benefit more from announcing open-market share repurchases. On average, I find that share repurchase announcements generate a 3-day cumulative abnormal return of 2.75%. Insiders are able to make a 3.76% abnormal return by trading within 90 days following the repurchase announcements. By examining insider net purchasing and net selling activities separately, I find that net purchasing activities are more prevalent and tend to generate higher abnormal return than net selling activities. The results in general support the timing ability of insiders to make profits by trading. I also find that the post-announcement insider trading activities are triggered by short-term mispricing subsequent to repurchase announcement. On the other hand, political connection is found to have no impact on abnormal announcement return, instead, undervaluation appears to be the primary driver for firms to announce open-market share repurchase. Sample firms with high book-to-market ratio tend to outperform their matching portfolios in the long run by 2.44%as they are more undervalued. However, this result only remains significant for non-politically connected firms when the full sample is divided according to political connection. It suggests that for undervalued firms, politically connected ones generally perform worse than non-connected repurchasing firms after the announcement, as they are unable to beat their matching portfolios in the long run.
