Market reaction to open-market stock repurchase announcements: Evidence from the insurance industry

The first part of this dissertation examines the wealth and information effects to insurance companies' announcements of open-market stock repurchase programs, while the second part investigates the underlying corporate motivations for share repurchases in the open market. Using standard event study methodology on a sample of insurance companies' open-market stock repurchase announcements, this study documents a significant positive wealth effect. The magnitude of the wealth effect is relatively smaller when compared to that presented in the literature for industrial firms. Between the different types of insurance companies, life insurers exhibit higher announcement returns than property and casualty insurers. Tobin's Q is a significant factor affecting announcement returns. Cross-sectional results provide strong support for Jensen's theory of the agency costs of free cash flow. The second part of the dissertation investigates the repurchase motivations predicted by the two competing theories (information signaling and agency costs of free cash flow). A sample of insurance companies announcing open-market stock repurchases is matched with a control sample of insurance companies not engaging in stock repurchases. Using the methodology of binary choice models (probit), the predictions of the signaling theory are tested against the predictions of the agency costs of free cash flow theory. Empirical evidence provides partial support to both theories.