Taiwan implemented the open market shares repurchase system beginning on August 7, 2000. This paper examines the announcement effects in the first year of this new system. The empirical results show that the cumulative average abnormal returns around the 3-day announcement period are significantly, negatively related to the Tobin’s q. Among high q firms, the abnormal returns are significantly negative related to the free cash flow, while the abnormal returns are significantly, positively related to the free cash flow among low q firms. Moreover, the change in insiders’ proportional holdings during the month preceding the announcement is significantly, negatively related to the abnormal return among low q firms, while it incurs an insignificantly positive relationship among high q firms. These results support our argument that two hypotheses, the traditional signaling hypothesis (TSH) and the free cash flow hypothesis (FCFH), exist simultaneously to explain the repurchase announcement effect. However, the investor will treat the under-valuation announcements with more skepticism than the excess cash-distribution announcements in a recession.
