The impact of share repurchase announcement on the stock return for IT venture company

Abstract

This study examines the impact of share repurchase announcement on the stock return of IT venture companies in Korea. While it is generally accepted that share repurchase announcement has a positive impact on stock returns, this paper intends to verify whether this also holds true for IT venture companies. Since IT ventures are relatively young and their stock returns tend to be more volatile than those of traditional manufacturing companies, their stocks might behave differently from those of traditional firms. If an IT venture``s stock repurchase announcement is proven to have a positive impact on its stock prices, we can say that the announcement is an important piece of information in determining stock prices of IT companies as it is for other companies. However, if no significant impact is shown, we can say that share repurchase announcement is not such an important piece of information that in determining share prices of IT venture firms. Event study is employed to see whether share repurchase announcement has a significant impact on the stock return. The market model is used for the adjustment of market risk. The cumulative abnormal return is calculated to test whether market participants perceive share repurchase announcement as important information in making their investment decisions. For sample data, 27 venture companies, which announced share repurchase during the period between March 2000 and November 2001, were selected out of 200 IT venture companies listed on KOSDAQ. The result shows that the stock market perceives IT firms`` share repurchase announcement as good news. It is also shown that IT venture companies make such announcements when their stock prices continue to fall, suggesting they utilize share repurchase as a tool to prevent their stock prices from declining further.