Heterogeneity and Strategic Choices: The Case of Stock Repurchases

39 Pages Posted: 24 Aug 2010

See all articles by Anup Menon Nandialath

Anup Menon Nandialath

Zayed University

Bernardo da Veiga

Curtin University - School of Economics and Finance

Date Written: August 22, 2010


Strategic decisions are fundamentally tough choices. Theory suggests that managers are likely to display bounded rationality. Empirics on the other hand assume rationality in choice behavior. Recognizing this inherent disconnect between theory and empirics, we try to account for behavioral biases using a theoretically consistent choice model. The traditional approach to modeling strategic choice has been to use discrete choice models and make inference on the conditional mean effects. We argue that the conditional mean effect does not capture behavioral biases. The focus should be on the conditional variance. Explicitly modeling the conditional variance (in the discrete choice framework) provides us with valuable information on individual level variation in decision-making. We demonstrate the effect of ignoring the role of variance in choice modeling in the context of firm’s decisions to conduct open market repurchases. We show that when taking into account the heterogeneity in choices, manager’s choices of conducting open market repurchases displays considerable heterogeneity and that not accounting for such heterogeneity might lead to wrong conclusions on the mean effects.

Keywords: Heterogeneity, Stock Repurchases, Probit, Choice Modelling, Strategic Descision Making

JEL Classification: C35, C44, C52, C53, G31, G34

Suggested Citation

Nandialath, Anup Menon and da Veiga, Bernardo, Heterogeneity and Strategic Choices: The Case of Stock Repurchases (August 22, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1663465 or http://dx.doi.org/10.2139/ssrn.1663465

Anup Menon Nandialath (Contact Author)

Zayed University ( email )

P.O. Box 19282
United Arab Emirates

Bernardo Da Veiga

Curtin University - School of Economics and Finance ( email )

GPO Box U 1987
Perth, Western Australia 6845

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