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ABSTRACT

Past studies on market efficiency suggest that stock repurchase announcements send a positive signal about the firm's future to investors, thereby significantly increasing the firm's stock price. Studies done on equity issue announcements suggest that they have the opposite effect and send a negative signal about the firm's future to investors. According to semi-strong form efficient market hypothesis, it is not possible to consistently outperform the market - appropriately adjusted for risk- by using public information such as stock repurchase and issue announcements. This type of information should be reflected in the firms' stock prices sufficiently fast to disallow any investors from earning an abnormal return. This study has resulted in mixed conclusions regarding the hypotheses selected. The tests conclude that the market is semi-strong form efficient with respect to both samples, stock repurchase announcements and equity issue announcements.

Key Words: Market Efficiency, Equity Issues, Stock Repurchases

INTRODUCTION

When a company publicly announces a stock repurchase or equity issuance, how does the market react? The Efficient Market Hypothesis (EMH), initially proposed by the University of Chicago's Eugene Fama in the 1960's, states the notion that financial markets are informationally efficient. In other words, security prices in financial markets accurately reflect all relevant and available information. Therefore, in an efficient market, no investor has access to any special information that he can use to make an above normal profit. In effect, if the markets are efficient, an investor can't beat the market. By testing the semi-strong market efficiency theory, this study will examine the effects of stock repurchase and equity issue announcements on the market price of stock (Fama, 1970).

The purpose of this research is to test semi-strong form market efficiency by examining how fast the risk adjusted rate of return of stock reacts to firms' stock repurchase and stock issue announcements. This study tests the level of market efficiency to see if acting on the public information imbedded in stock repurchase or issue announcements produces an unusual return, or if the investor must act illegally on inside information to "beat" the market. Specifically, is it possible to earn an abnormal return on a publicly traded stock when a firm releases stock repurchase and equity issue announcements?

LITERATURE REVIEW

When companies believe their stock...

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