Volatility and the Buyback Anomaly

Abstract

We find that, inconsistent with the low volatility anomaly, post-buyback announcement long-term abnormal returns are higher when the pre-announcement (idiosyncratic) volatility is high. This is consistent with Stambaugh, Yu, and Yuan (2015) who find a positive relation between returns and idiosyncratic volatility for undervalued stocks, and with the prediction that a repurchase authorization is an option for undervalued stocks (Ikenberry and Vermaelen, 1996). The buyback anomaly also survives when using the five-factor model of Fama and French (2015a). Combining volatility with undervaluation indicators proposed by Peyer and Vermaelen (2009) improves the predictive power of excess returns after buyback announcements.

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