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Share Repurchases, the Clustering Problem, and the Free Cash Flow Hypothesis


  • We appreciate the helpful comments from Bill Christie (the editor), an anonymous referee, and participants at the University of Manchester. Wang acknowledges the financial support from the National Science Council, Taiwan (NSC 95-2416-H-002-060). Any remaining errors are our own.


We examine the market reaction to announcements of actual share repurchases, events that cluster both within and across firms. Using a multivariate regression model, we find that the market reacts positively to the events, indicating that these announcements provide additional information to that contained in the initial repurchase intention announcements. Further, the market response is especially favorable for firms with overinvestment problems as measured by Tobin's q, and is not related to signaling costs as measured by the size of the repurchase. Our findings generally support the hypothesis that share repurchases reduce the agency costs of excessive free cash flow.