Impact of business cycles on share repurchases in the Finnish stock market

Share repurchases have been studied in-depth from the perspective of the firm management’s motivation and shareholders’ wealth maximization. Recently, there has been done studies examining share repurchases from the perspective of the business cycle. Such studies motivated the researcher to examine the abnormal returns accrued from share repurchase announcements done by Finnish companies in short- and long-term based on the business cycle. Thus, the author had three objectives to explore. First was to determine the short- and long-term returns caused by share repurchases on the Finnish market. Second was to examine if there is a significant difference in the abnormal returns earned through buybacks in economic downturn and upturn in the Finnish market. Third objective was to explore motivation of the company management to announce a share buyback program with regards and/or regardless of business cycle. A quantitative approach was chosen to study the objectives. Since the subject of the study was the share repurchases done on the Finnish market as a market portfolio index OMX Helsinki 25 was utilized. The information about share repurchase announcements was gathered manually from the Nasdaq OMX Nordic’s website. The financial data was derived from reports published by companies on their websites. As an indicator of the business cycle, composite monthly indicator of business cycle, which is tailored for the Finnish market by the National Audit Office of Finland, was used. To understand if the sample is representative of the normal population, parametric and non-parametric tests were used: one-sample t-test, the independent samples t-test and one-sample Wilcoxon signed-rank. To investigate the relationship between abnormal returns and multiple hypotheses that are potentially explaining the source of the abnormal returns the multiple linear regressions were utilized. Based on the developed knowledge base and statistical analysis techniques, researcher explored the objectives. The analysis showed that share repurchases contribute to the abnormal returns in the short- and long-term. Regression model proved the free cash flow and signaling hypotheses to be explanatory for the abnormal returns on the general level. Though, the results of the regression analysis were limited when analyzing motives by business cycle. Due to the lack of events, researcher was not able to conclude if returns differ in expansion and recession. Other limitations of the present research were discussed, and recommendations were made for future research