This article was subject to double-blind peer review.
Open-Market Stock Repurchases by Insurance Companies and Signaling
Article first published online: 25 MAR 2013
© Risk Management and Insurance Review, 2013
Risk Management and Insurance Review
Volume 16, Issue 1, pages 47–69, Spring 2013
How to Cite
Huang, G.-C., Liano, K., Manakyan, H. and Pan, M.-S. (2013), Open-Market Stock Repurchases by Insurance Companies and Signaling. Risk Management and Insurance Review, 16: 47–69. doi: 10.1111/rmir.12003
- Issue published online: 25 MAR 2013
- Article first published online: 25 MAR 2013
The signaling hypothesis of share repurchases implies that management uses repurchases to signal either that their firm's future operating performance will improve or that shares of their stock are simply underpriced by the market. This study examines which of the two interpretations can better explain open-market share repurchase programs announced by insurance companies. We find no evidence that future-operating performance of insurers improves following the repurchase announcement. In addition, changes in future operating performance cannot explain the announcement-period abnormal return. Instead, the stock undervaluation prior to the repurchase announcement can significantly explain the announcement-period abnormal return, particularly for life insurers. Overall, our results suggest that the positive market reaction to insurers’ open-market share repurchase announcements is due to the stock undervaluation by the market, but not due to positive information content about future operating performance conveyed in the repurchase announcement.