Study On Stock Repurchase Effect In China Listed Companies

Stock repurchase of listed company originated from the avoidance of government restriction on cash bonus of American companies in the seventies of the20th century. Especially after the year of1984, due to the prevalence hostile takeover many listed companies went into stock market and repurchased their own stock to maintain the control. Compared with the western developed countries, listed companies face many issues that need to be addressed urgently because stock market of our country started relatively late and it is characterized by the equity division. Therefore, to reinforce the cognition and understanding of stock repurchase of managing hierarchy of listed company and investors has positive effect for developing stock market of our country. Measures on administration of Listed Companies ’Buying Back the Shares Held by the Public (for trial implementation) was issued On June16th in2005by China Securities Regulatory Commission, and stock repurchase of our country has entered into a new stage.In this paper, Event study methodology was used to analyze two samples of listed companies that made repurchase announcement after the share reform in our country. Repurchase effect was tested by the calculation whether there exists positive cumulative abnormal return before and after the announcement or not. Results show that there is signaling effect for stock repurchase of our country, which illustrates that good news is conveyed to the market by the behavior of repurchase of the company and this in turn supports the stock price. Existence of equity incentive effect in management hierarchy has been proved by analyzing the samples of equity incentive stock and it shows that board of directors can avoid the dilution of earnings per share by substituting dividend with stock repurchase. Furthermore, finance indicators was compared before and after the repurchase in this paper and results show that repurchase can improve the earning level, overall value and capital structure of company. Besides, positive abnormal return is observed before the announcement during the process of testing the abnormal return, which means information disclosure occurred before the announcement of the repurchase plan and the phenomena of insider trading and price manipulation existed. It is expected that by analyzing and testing this set of effects, some guidance can be provide for the management hierarchy of listed companies in our country.