Signalling Properties of On-market Share Buy-backs: Why Precision Pays

Using the precise announcement mechanism, transparent and detailed disclosure available for ASX on-market buy-backs we document a relatively sharper 2.2 percent announcement response relative to recent US evidence. We find structural buy-back variables namely: type of buy-back, the time frame of (especially if unlimited) as well as management (undervaluation and gearing) motivations are all valuable signaling aspects in the announcement. These structural and management motivations variables account for 43% of the total amount explained for the announcement effect. Further, these variables remain significant even once other firm-specific economic characteristics are introduced. Economic variables of information signaling, (economic) undervaluation and free-cash-flow still remain important. Investigating the dual signaling nature of buy-backs, we find the immediate announcement response persists for up to 6-months following the announcement. However, the marginal post-announcement reaction is higher (i) the lower the completion rate, (ii) the lower the program size; and (iii) the greater the book-to-market ratio. Other variables relevant for explaining the announcement effect cease to be important for the marginal response. Actual repurchases generate little marginal signaling benefit and consistent with previous literature are largely driven by management strategic trading and perceived immediate undervaluation.