Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers?

46 Pages Posted: 17 Jan 2012 Last revised: 7 Jan 2013

See all articles by Harrison Liu

Harrison Liu

University of Texas at San Antonio - Department of Accounting

Edward P. Swanson

Texas A&M University - Mays Business School; Mays Business School, Texas A&M University

Date Written: January 16, 2012

Abstract

We provide large sample evidence in response to anecdotal accounts that some managers increase corporate share repurchases in response to an increase in short selling. We discover a robust positive association exists between changes in quarterly share repurchases and contemporaneous changes in short interest. The positive association exists in univariate tests, multivariate models, and subsamples. Some companies are therefore increasing share repurchases when shorts believe the stock is overvalued. The next question is whether they do so to support overvalued equity, which would be a serious violation of the SEC requirement that price be set by “independent market forces without undue influence by the issuer” (SEC 2003). We examine future stock prices, accounting fundamentals, and trading by insiders for evidence of overvaluation. The overall evidence is more consistent with equity that is fairly valued, which would mean that managers trade against the shorts when shorts are mistaken. An unsolved puzzle is why the shorts sellers do not react by unwinding their higher positions.

Keywords: short interest, share repurchases, insider trading, arbitrage

JEL Classification: M40, M41

Suggested Citation

Liu, Harrison and Swanson, Edward P., Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers? (January 16, 2012). Available at SSRN: https://ssrn.com/abstract=1986396 or http://dx.doi.org/10.2139/ssrn.1986396

Harrison Liu

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Edward P. Swanson (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-8970 (Phone)
979-845-0028 (Fax)

Mays Business School, Texas A&M University ( email )

Wehner, MS 4353
College Station, TX 77843-4353
United States
979-845-5014 (Phone)
979-845-0028 (Fax)

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