Share Repurchase Programs by Banks

Bank Banks, Systems
2006 unpublished
We study two motivations behind open-market share repurchases by banks. Our first hypothesis is the signaling hypothesis-banks use share repurchase announcements to signal higher future performance. Our second hypothesis is the "optimal capital ratio" hypothesis-banks use share repur-chases to manage their capital ratios, and the positive announcement effect is the result of an increased value of the deposit insurance. We find that banks announcing share repurchases have a positive
more » ... sitive industry-adjusted change in ROA during the two years following the announcement, consistent with the signaling hypothesis. We also find evidence in support of our second hypothesis: banks announcing share repurchase programs experience a reduction in their capital ratios subsequent to the repurchase announcement. The reduction in capital ratios occurs without a change in the asset growth rate or dividend payout ratio. We also find that the announcement effect is positively related to the growth in capital ratios prior to the announcement and to a decrease in capital ratios subsequent to the announcement, supportive of the optimal capital ratio hypothesis.