Skip to main content
×
Home
    • Aa
    • Aa

The Credibility of Open Market Share Repurchase Signaling

  • Ilona Babenko (a1), Yuri Tserlukevich (a2) and Alexander Vedrashko (a3)
Abstract
Abstract

Open market share repurchase announcements are commonly associated with equity undervaluation, but their signal about firm value can often be misleading. We conjecture that executives who buy shares of their firm before an announcement add credibility to the undervaluation signal. Consistent with this hypothesis, we find that announcement returns are positively related to past insider purchases, especially for firms that are priced less efficiently. Firms whose insiders bought more shares are also more likely to complete their repurchase plans. Finally, we find that insider purchases predict post-announcement stock returns.

Copyright
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

D. Aboody ; J. Hughes ; J. Liu ; and W. Su . “Are Executive Stock Option Exercises Driven by Private Information?Review of Accounting Studies, 13 (2008), 551570.

I. Babenko Share Repurchases and Pay-Performance Sensitivity of Employee Compensation Contracts.” Journal of Finance, 64 (2009), 117150.

L. Bebchuk ; A. Cohen ; and A. Ferrell . “What Matters in Corporate Governance?Review of Financial Studies, 22 (2009), 783827.

S. Benartzi ; R. Michaely ; and R. Thaler . “Do Changes in Dividends Signal the Future or the Past?Journal of Finance, 52 (1997), 10071034.

M. T. Billett , and H. Xue . “The Takeover Deterrent Effect of Open Market Share Repurchases.” Journal of Finance, 62 (2007), 18271850.

A. Brav ; J. R. Graham ; C. R. Harvey ; and R. Michaely . “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483527.

P. Brockman , and D. Y. Chung . “Managerial Timing and Corporate Liquidity: Evidence from Actual Share Repurchases.” Journal of Financial Economics, 61 (2001), 417448.

S. J. Brown , and J. B. Warner . “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (1985), 331.

B. Cadman ; S. Klasa ; and S. Matsunaga . “Determinants of CEO Pay: A Comparison of ExecuComp and Non-ExecuComp Firms.” Accounting Review, 85 (2010), 15111543.

K. Chan ; D. L. Ikenberry ; I. Lee ; and Y. Wang . “Share Repurchases as a Tool to Mislead Investors.” Journal of Corporate Finance, 16 (2010), 137158.

G. M. Constantinides , and B. D. Grundy . “Optimal Investment with Stock Repurchase and Financing as Signals.” Review of Financial Studies, 2 (1989), 445465.

J. E. Core , and D. F. Larcker . “Performance Consequences of Mandatory Increases in Executive Stock Ownership.” Journal of Financial Economics, 64 (2002), 317340.

S. A Corwin . “The Determinants of Underpricing for Seasoned Equity Offers.” Journal of Finance, 58 (2003), 22492279.

K. B. Diether ; C. J. Malloy ; and A. Scherbina . “Difference of Opinion and the Cross-Section of Stock Returns.” Journal of Finance, 57 (2002), 21132141.

A. K Dittmar . “Why Do Firms Repurchase Stock?Journal of Business, 73 (2000), 331355.

R. D’Mello , and P. K. Shroff . “Equity Undervaluation and Decisions Related to Repurchase Tender Offers: An Empirical Investigation.” Journal of Finance, 55 (2000), 23992424.

E. F. Fama , and K. R. French . “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.

J. M Fried . “Open Market Repurchases: Signaling or Managerial Opportunism?Theoretical Inquiries in Law, 2 (2001), 865894.

G. Grullon , and R. Michaely . “The Information Content of Share Repurchase Programs.” Journal of Finance, 59 (2004), 651680.

J. Helwege ; C. Pirinsky ; and R. M. Stulz . “Why Do Firms Become Widely Held? An Analysis of the Dynamics of Corporate Ownership.” Journal of Finance, 62 (2007), 9951028.

H. Hong ; T. Lim ; and J. C. Stein . “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies.” Journal of Finance, 55 (2000), 265295.

H. Hong , and J. C. Stein . “A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets.” Journal of Finance, 54 (1999), 21432184.

K. M. Howe ; J. He ; and G. W. Kao . “One-Time Cash Flow Announcements and Free Cash-Flow Theory: Share Repurchases and Special Dividends.” Journal of Finance, 47 (1992), 19631975.

N. Isagawa Open-Market Repurchase Announcements and Stock Price Behavior in Inefficient Markets.” Financial Management, 31 (2002), 520.

M. Jagannathan ; C. P. Stephens ; and M. S. Weisbach . “Financial Flexibility and the Choice between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355384.

L. Jin CEO Compensation, Diversification, and Incentives.” Journal of Financial Economics, 66 (2002), 2963.

M. Kahl ; J. Liu ; and F. A. Longstaff . “Paper Millionaires: How Valuable Is the Stock to a Stockholder Who Is Restricted from Selling It?Journal of Financial Economics, 67 (2003), 385410.

K. M Kahle . “When a Buyback Isn’t a Buyback: Open Market Repurchases and Employee Options.” Journal of Financial Economics, 63 (2002), 235261.

S. Krishnaswami , and V. Subramaniam . “Information Asymmetry, Valuation, and the Corporate Spinoff Decision.” Journal of Financial Economics, 53 (1999), 73112.

J. Lakonishok , and I. Lee . “Are Insider Trades Informative?Review of Financial Studies, 14 (2001), 79111.

E. Lie Excess Funds and Agency Problems: An Empirical Study of Incremental Cash Disbursements.” Review of Financial Studies, 13 (2000), 219247.

T. Loughran , and J. R. Ritter . “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55 (2000), 361389.

H. Louis , and H. White . “Do Managers Intentionally Use Repurchase Tender Offers to Signal Private Information? Evidence from Firm Financial Reporting Behavior.” Journal of Financial Economics, 85 (2007), 205233.

M. Massa ; Z. Rehman ; and T. Vermaelen . “Mimicking Repurchases.” Journal of Financial Economics, 84 (2007), 624666.

W. F. Maxwell , and C. P. Stephens . “The Wealth Effects of Repurchases on Bondholders.” Journal of Finance, 58 (2003), 895919.

M. L. Mitchell , and E. Stafford . “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287329.

W. K. Newey , and K. D. West . “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.

J. Oded “Why Do Firms Announce Open-Market Repurchase Programs?Review of Financial Studies, 18 (2005), 271300.

E. Ofek , and D. Yermack . “Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership.” Journal of Finance, 55 (2000), 13671384.

A. R. Ofer , and A. V. Thakor . “A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchases and Dividends.” Journal of Finance, 42 (1987), 365394.

M. A Petersen . “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435480.

U. C. Peyer , and T. Vermaelen . “The Nature and Persistence of Buyback Anomalies.” Review of Financial Studies, 22 (2009), 16931745.

E. Ravina , and P. Sapienza . “What Do Independent Directors Know? Evidence from Their Trading.” Review of Financial Studies, 23 (2010), 9621003.

H. N Seyhun . “Insiders’ Profits, Costs of Trading, and Market Efficiency.” Journal of Financial Economics, 16 (1986), 189212.

A. Shleifer , and R. W. Vishny . “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 3555.

D. J Skinner . “The Evolving Relation between Earnings, Dividends, and Stock Repurchases.” Journal of Financial Economics, 87 (2008), 582609.

T. Vermaelen Common Stock Repurchases and Market Signaling.” Journal of Financial Economics, 9 (1981), 139183.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 173 *
Loading metrics...

Abstract views

Total abstract views: 440 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 30th May 2017. This data will be updated every 24 hours.