A Test of Market Efficiency based on Share Repurchase Announcements

Abstract

Capital markets play a central role in resource allocation in an economy. They must be efficient for optimal resource allocation. This study tests market efficiency using event study method. The results, based on share repurchase announcements (event), confirm some earlier findings and refute others. The results can be explained through behavioural models of under and over reaction. Sub sample analysis shows opposite results to existing literature. There is some evidence that market responds selectively to share repurchase announcement of firms depending upon their recent performance-firms with positive earnings growth in the year prior to repurchase announcement perform better than firms with negative earnings growth.

Keywords: Market Efficiency, Share Repurchase, Event Study, Efficient Market Hypothesis