Information content of open-market stock repurchase and dividend policy

Numerous studies have documented that the stock market reacts, on average, positively to open market repurchases and dividend increase announcements. Most studies draw their conclusions based on the belief that the motivations for different stock repurchase programs are the same across firms, or the motivations for dividend increase are the same for different firms. However, we find that the stock market reacts negatively to about 20--30% stock repurchase announcements or dividend increase announcements every year from 1985 to 1999. This evidence is not documented in any previous literature; therefore, none of the existing hypotheses provide satisfactory explanations.;There have been at least thousands of event studies written since Fama et al. (1969) and almost all use cumulative average abnormal return or average abnormal return to examine the issues and draw the conclusions. Using the average abnormal returns methodology is appropriate for the following situations: (1) the purpose of a study is to examine the average market reaction of event; (2) the direction and/or the magnitude of investors' perception to the event is known according to the pre-developed theory, and the average abnormal return of the event is used to test the theory; (3) the competing theories have different implications on the direction and/or the magnitude of the market reaction, and the average abnormal return is examined to test which theory is correct.;Essay 1 of this study focuses on the market reactions of the stock repurchases, while essay 2 examines the market reactions to the dividend increase announcements. Essay 3 examines the information content of the different stated reasons of open-market share repurchase. This study shows that this negative reaction is not a random phenomenon, but is based on the announcement firms' characteristics and the market's perception of the change in the firm's future performance.