Does the interest rate environment matter? Evidence from share repurchase announcements

Sammanfattning: This paper investigates how the interest rate environment affects cumulative abnormal returns (CAR) around share repurchase announcements. Even though previous findings regarding this relationship are limited, anecdotal evidence claims that the low interest rate environment is the driver behind the increased amounts of share repurchase programs in recent years. To test this relationship, we use a two-step methodology for a sample of US listed companies. Firstly, we determine CAR for 3 event windows. Secondly, we perform a regression analysis to quantify the interest rate environment effect on estimated abnormal returns. The results of our analysis are mixed. While a low interest rate environment is associated with lower CAR for 3-day (-1, 0, 1) event window, the low interest rate has an insignificant effect for 7-day (-3, 0, 3) CAR and a strong positive impact on 61-day (-30, 0, 30) CAR. We propose that the findings can be explained by higher market expectations of share repurchase announcements in a low interest rate environment. However, the positive relationship between the low interest rate environment and 61-day CAR indicates a market learning process through information signaled by share repurchases when interest rates are low. Despite the plausible explanation provided, the results present an empirical puzzle that requires further research.