The Effects of Open-Market Stock Repurchases by Insurance Companies

Abstract

We examine the effects of stock repurchase annnouncements on the value of the announcing insurance firms and on the value of rival insurance firms. We find that insurance firms experience a significant increase in value at the time of the announcement. Repurchasing firms continue to earn excess returns for several months after the announcement. We study the intra-industry effect of the announcements and find that there is a significant decrease in value of rival insurance firms. This suggests that perceived changes in the competitive positions of repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Cross-sectional tests show that the increase in the value of repurchasing firms is related to the relative size of the buyback, stock returns prior to the announcement and the market-to-book ratio.

Keywords: Repurchase announcements, insurance stocks, stock buyback, intra-industry effects