The Information Content Of Stock Repurchase In China

Stock repurchase has already widely been used in western countries both as a dividend policy and as a capital operation tool. In China, however, there are rare practices and studies based on such subject. Therefore, stock repurchase is an impending project we will confront in our country's academic fields.The core object of this thesis was to examine which theory, Signaling theory or Free cash flow theory, fited the stock repurchase of Chinese corporations most. By doing that, we can explain the information content of Chinese examples. Following the design of Grullon and Michaely(2004),this thesis deduced the information content from two theories separately to put forward three kinds of hypothesis based on corporate performance, investment and systematic risk. Setting two kinds of repurchasing tools(Tender-offer and Open-market) as moderating variables,the author applied the Event Study Methodology based on accounting information and picked matching firms following the performance-matching rules and tested the variables based on a two-tailed Wilcoxon rank test. The results showed that repurchasing firms, especially tender-offer firms experienced a growth both in operating performance and level of investment following the event, which supported the Signaling Theory. By combining Chinese reality,the author expounded the meaning even further to suggest the reason why Chinese listed corporations decided to repurchase stock was that it could benefit them by solving problems like countervailing debt by substantial shareholders, improving quality of assets and achieving structural adjustment strategically etc, which enabled these corporations to grasp prospective investment opportunities. Hence, stock repurchase of Chinese corporation not only contained information of investment opportunity indirectly but also served as a problem-solving tool, although it cannot enhance corporate capabilities permanently. Therefore, this thesis filled the blanks of relevant domestic studies on stock repurchase, and the realistic meaning of the conclusion part provided guidence to Chinese listed corporations as well as investors. In the end, aiming at overcoming the drawbacks of this thesis, the author provided some clues for future studies, among which were that the research on Open-market repurchase based on Equities Incentives and research on Tender-offer repurchase based on Tender-offer Pricing were both valuable subjects in the future.