Share Repurchases as a Potential Tool to Mislead Investors

42 Pages Posted: 8 Oct 2009 Last revised: 16 Mar 2010

See all articles by Konan Chan

Konan Chan

National Chengchi Unversity (NCCU) - Finance

David L. Ikenberry

Leeds School of Business, University of Colorado Boulder

Inmoo Lee

KAIST College of Business

Yanzhi Wang

Yuan Ze University - Department of Finance

Date Written: August 1, 2009

Abstract

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.

Keywords: Share repurchase, Earnings management, Managerial signal

JEL Classification: G30, G35

Suggested Citation

Chan, Konan and Ikenberry, David L. and Lee, Inmoo and Wang, Yanzhi, Share Repurchases as a Potential Tool to Mislead Investors (August 1, 2009). Journal of Corporate Finance, Vol. 16, No. 2, 2010, Available at SSRN: https://ssrn.com/abstract=1485583 or http://dx.doi.org/10.2139/ssrn.1485583

Konan Chan (Contact Author)

National Chengchi Unversity (NCCU) - Finance ( email )

No. 64, Chih-Nan Road
Section 2
Taipei, 11623
Taiwan
+886-2-29393091 ext 81239 (Phone)

David L. Ikenberry

Leeds School of Business, University of Colorado Boulder ( email )

Boulder, CO 80309-0419
United States
303-492-1809 (Phone)

Inmoo Lee

KAIST College of Business ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Yanzhi Wang

Yuan Ze University - Department of Finance ( email )

135, Far-East Rd., Chung-Li
Taoyuan, ROC
Taiwan