Prior research has documented positive abnormal stock returns around the announcements of repurchase programs; several explanations of these returns have been suggested, including signaling, free cash flow, and wealth redistributions. This study analyzes abnormal stock, bond, and firm returns around repurchase announcements to examine these hypotheses. We find evidence consistent with both signaling and wealth redistribution. The loss to bondholders is a function of the size of the repurchase, and the risk of the firm's debt. We also find that bond ratings are twice as likely to be downgraded as upgraded after the announcement of the repurchase program.

Unlike Dutch auction repurchases and tender offers, open-market repurchase programs do not precommit firms to acquire a specified number of shares. In a sample of 450 programs from 1981 to 1990, firms on average acquire 74 to 82 percent of the shares announced as repurchase targets within three years of the repurchase announcement. We find that share repurchases are negatively related to prior stock price performance, suggesting that firms increase their purchasing depending on its degree of perceived undervaluation. In addition, repurchases are positively related to levels of cash flow, which is consistent with liquidity arguments.

Unlike Dutch auction repurchases and tender offers, open‐market repurchase programs do not precommit firms to acquire a specified number of shares. In a sample of 450 programs from 1981 to 1990, firms on average acquire 74 to 82 percent of the shares announced as repurchase targets within three years of the repurchase announcement. We find that share repurchases are negatively related to prior stock price performance, suggesting that firms increase their purchasing depending on its degree of perceived undervaluation. In addition, repurchases are positively related to levels of cash flow, which is consistent with liquidity arguments.

We hypothesize that announcing open market share repurchases (OMRs) to counter negative valuation shocks reveals repurchasing firms’ lost growth opportunities or underperforming assets to potential bidders, making them more likely to become takeover targets. This also leads their investors to face higher takeover risk, a systematic risk associated with economic fundamentals that drive takeover waves, as proposed by Cremers et al. (2009). Indeed, we find that repurchasing firms tend to face higher takeover probability in the first few years following their OMR announcements, and that the increase in takeover risk can largely explain their post-announcement long-run abnormal returns documented in the literature. The increase in takeover risk is larger for smaller firms, firms with poorer pre-announcement stock performance, and those attracting more attention of market participants. Our results suggest that OMRs, which are used by many firms to counter undervaluation, could make the firms more sensitive to takeover waves and raise their cost of equity capital.