Open Market Repurchases: Signaling or Managerial Opportunism?
Jesse M. Fried
Harvard Law School; European Corporate Governance Institute (ECGI)
Theoretical Inquiries in Law, Vol. 2, pp. 865-894, 2001
UC Berkeley Public Law Research Paper No. 64
Managers conduct open market repurchases (OMRs) for a number of different reasons, including to distribute excess cash. However, the most widely discussed explanation for OMRs is the signaling theory: that managers announce OMRs to signal that the stock is underpriced. The first purpose of this paper is to show that the signaling theory is theoretically problematic - in part because it assumes managers deliberately sacrifice their own wealth to increase that of shareholders - as well as inconsistent with much of the empirical evidence. The second purpose of the paper is to put forward an alternative explanation for managers' use of OMRs: the managerial-opportunism theory. This theory, which assumes that managers seek to maximize their own wealth, predicts that managers announce OMRs both when the stock is underpriced and when it is not. When the stock is underpriced, managers announce and conduct an OMR to transfer value to themselves and other remaining shareholders. When managers wish to sell a large portion of their shares, they announce an OMR to boost the stock price before selling their shares. The paper shows that managerial opportunism is not only a more plausible motive for OMRs than is signaling, it is also more consistent with the empirical data. The paper concludes by describing some testable predictions of the theory.
Number of Pages in PDF File: 30
Keywords: share repurchases, open market repurchases, signaling, managerial opportunism, insider trading, payout policy
JEL Classification: G32, G35, G38, K22Accepted Paper Series
Date posted: August 30, 2001 ; Last revised: September 27, 2010
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