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Dissertation
Synthetic repurchase programs through put derivatives: theory and evidence
Doctor of Philosophy (Ph.D.), Drexel University
Jun 2001
DOI:
https://doi.org/10.17918/etd-45
Abstract
A Synthetic Repurchase is an open market share repurchase program enhanced with sales of put derivatives on the firm's own stock. Microsoft, in 1999, using a synthetic repurchase program sold put derivatives on its own stock and received $766 million in premiums and, at the same time, signaled that it is a good-quality company and certified its future earnings. I present theoretical rationale that explains why a synthetic repurchase program provides an efficient signal about a firm's future prospects and how it establishes a separating equilibrium between good and bad firms. I also postulate that the signal provides quality certification about the firms' future prospect. A sample of all companies that are known to have sold put derivatives was collected by searching 10-K and 10-Q statements published between January 1988 and January 2000. The sample includes the 53 identified companies that have initiated synthetic repurchase programs. I find empirical confirmation of the signaling hypothesis for synthetic repurchases. Event study results empirically confirm the theoretical hypothesis that the initiation of a synthetic repurchase program provides a positive signal to the market. Also, the empirical results confirm the theoretical hypothesis that the termination of a synthetic repurchase program is a negative signal to the market. The market reacts positively to the initiation of a synthetic repurchase program, and negatively to its termination. I also performed an EPS analyst forecast revisions event study with very similar results, which also confirm the signaling hypothesis of asymmetric information.. Results also show a positive and statistically significant 11.7% book-to-market and size-adjusted buy-and-hold abnormal average annual return. In addition, I find a significant improvement in various measures of the financial profiles of the firms in the sample subsequent to the put derivative sale. Finally, I observe that these firms have higher earning, R & D expenditures, and cash flows as compared with two industry-and-size-matched control samples of rival firms with and without repurchase programs respectively. Risky R & D expenditures force a firm to initiate synthetic repurchase programs in order to signal the market about their expectation of good future EBIT figures.
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Details
- Title
- Synthetic repurchase programs through put derivatives
- Creators
- Stanley Bojidarov Gyoshev - DU
- Contributors
- George Tsetsekos (Advisor) - Drexel University (1970-)
- Awarding Institution
- Drexel University
- Degree Awarded
- Doctor of Philosophy (Ph.D.)
- Publisher
- Drexel University; Philadelphia, Pennsylvania
- Resource Type
- Dissertation
- Language
- English
- Academic Unit
- Bennett S. LeBow College of Business; Drexel University
- Other Identifier
- 45; 991014632833804721