Investor Heterogeneity, Investor-Management Agreement and Open-Market Share Repurchases

Posted: 15 Mar 2010 Last revised: 13 Nov 2013

See all articles by Anjan V. Thakor

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Sheng Huang

China Europe International Business School

Date Written: September 15, 2011

Abstract

This paper develops and tests a new theoretical explanation for why a firm conducts open-market stock repurchases. Investors may disagree with the manager about the firm’s investment projects. A repurchase causes a change in the investor base as investors who are more likely to disagree with the manager tender their shares. This model leads to the following predictions. First, a firm is more likely to buy back shares when the level of investor-management agreement is low. Second, the level of agreement improves following a repurchase. Our empirical tests provide strong support for these predictions. The results are robust to controls for information asymmetry, diversity of investor opinion, and other factors that may drive a firm’s share repurchase decision. Overall, the evidence is consistent with firms strategically using repurchases to improve alignment between management and shareholders.

Keywords: stock repurchase, corporate payout, agreement, investor heterogeneity

JEL Classification: G30, G35

Suggested Citation

Thakor, Anjan V. and Huang, Sheng, Investor Heterogeneity, Investor-Management Agreement and Open-Market Share Repurchases (September 15, 2011). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1570485 or http://dx.doi.org/10.2139/ssrn.1570485

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Sheng Huang (Contact Author)

China Europe International Business School ( email )

Buidling 20, Zhongguancun Software Park
#8, Dongbeiwang West Road
Beijing, 100193
Singapore
86-10-82966804 (Phone)
86-10-82966888 (Fax)

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