Share Buyback Announcements and their Implications for Risk Management

Abstract: This thesis is composed of two separate papers, examining the relationship between share buyback announcements and risk management: "Corporate Cash Holdings, Share Buyback Announcements and their Implications for Risk Management" and "Share Buyback Announcements and Market Liquidity". Share repurchase announcements are often followed by a deterioration of a company's risk profile. While it appears intuitive that the announcement is the cause of the increase of the perceived risk level, in the first paper, the aim is to establish the causal nature of this relationship more formally. Credit default swap spreads are used as a proxy for the risk level and an event study using a market model extended by a generalized autoregressive conditional heteroskedasticity process is performed. I find that the credit risk level deteriorates especially for companies with low cash holdings, and for those sustaining an increasing trend of their corporate savings prior to the event. In the second paper, these results are amplified and I study the effect of the financial crisis of 2007 - 2008 on the relationship between share buybacks and credit risk. Thereby, the biggest credit risk deterioration happens for share repurchase announcements in the post-crisis period, and for rather elevated buyback values. Most of these repurchases are financed internally using corporate savings. Hence, the findings imply that liquidity management and cash buffers increased in importance after the recent financial crisis and became a central strategic topic for companies.