Share Repurchases as a Potential Tool to Mislead Investors
National Chengchi University (NCCU)
David L. Ikenberry
Leeds School of Business, University of Colorado Boulder; University of Illinois at Urbana-Champaign - Department of Finance
KAIST Graduate School of Finance
Yuan Ze University - Department of Finance
August 1, 2009
Journal of Corporate Finance, Vol. 16, No. 2, 2010
A rich literature argues that stock repurchases often serve as positive economic signals beneficial to investors. Yet due to their inherent flexibility, open market repurchase programs have long been criticized as weak signals lacking commitment. We evaluate whether some managers potentially use buyback announcements to mislead investors. We focus on cases where managers were seemingly under heavy pressure to boost stock prices and might have announced a repurchase only to convey a false signal. For suspect cases, the immediate market reaction to a buyback announcement does not differ from that generally observed. However over longer horizons, suspect firms do not enjoy the improvement in economic performance otherwise observed. Suspect firms repurchase less stock. Further, managers in suspect firms have comparatively higher exposure to stock options, a potentially endogenous result suggesting greater sensitivity to both stock valuation and to future equity dilution. Overall, the results suggest only a limited number of managers may have used buybacks in a misleading way as “cheap talk.” Yet as theory also suggests, we find no long-run economic benefit to this behavior.
Number of Pages in PDF File: 42
Keywords: Share repurchase, Earnings management, Managerial signal
JEL Classification: G30, G35working papers series
Date posted: October 8, 2009 ; Last revised: March 16, 2010
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