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Using Buyback Announcements to Select Stocks Around Earnings

Article Quantpedia
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Summary

This equity strategy uses the timing of corporate announcements as a signal for stock performance around earnings. The proposed explanation is that managers may have information about upcoming results: they tend to announce repurchases ahead of favorable earnings and secondary equity offerings ahead of unfavorable earnings. The described implementation takes long positions in companies announcing a sufficiently large buyback shortly before an earnings announcement, then holds them across a window around the report.

The rules screen US-listed stocks, exclude the smallest quarter by market capitalization and several security types, and rebalance an equally weighted portfolio daily. The cited study reports that earnings-period market reaction after repurchase announcements exceeded that after SEO pricings by 4.56% over a 25-trading-day window. The page favors the long-only version for simplicity, while noting that a long-short approach is also described in the source paper. It cautions that the strategy has high broad-market exposure and is not designed as a bear-market hedge. The excerpt gives no fuller backtest details or implementation costs.

Key ideas

  • Repurchase announcement timing may signal managers’ expectations for upcoming earnings.
  • The strategy buys qualifying stocks whose buyback announcements precede earnings reports.
  • The portfolio holds positions across a window surrounding the earnings announcement.
  • The cited study reports a 4.56% difference in market reaction over 25 trading days.
  • The long-only approach has substantial equity market exposure and is not a bear-market hedge.

Tags

EquitiesEvent-drivenUS marketsBacktestingRisk management

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.