Using Discriminant Analysis to Predict the Market Reaction to Open-Market Stock Repurchase Announcements (Manuscripts)

ABSTRACT It has been well documented that although there is a substantial positive stock price reaction to stock repurchase announcements, about thirty per cent of the firms that announce open market stock repurchases experience negative abnormal returns at announcement. This paper examines the apparent heterogeneity in the stock price reaction to stock repurchase announcements and tries to determine whether the sign of the stock market reaction can be predicted from ex ante firm specific variable. I find that the discriminant analysis can be used to predict the signs of the announcement reaction to open market stock repurchase announcements with a high degree of accuracy and that the percentage of shares owned by institutions, the firm's earnings volatility, the firm size, and the earnings growth prospects are important factors determining the signs of market reaction. The discriminant analysis model yields an accuracy rate of 92% in predicting positive announcement reactions and 74% in predicting predicted negative reactions.