The Impact of Cash, Debt, and Insiders on Open Market Share Repurchases

Abstract

We employ a conditional event study to analyze managers’ motives to announce a share repurchase in the context of a model of economic factors that impact a firm’s abnormal announcement return. Firms with greater free cash flow and less debt are more likely to initiate a repurchase. Share repurchases have greater impact on share prices when they are large and occur during the stock price downtrend – smaller, routine share repurchases have a lesser impact on share prices. Managing insiders in repurchasing firms tend to decrease their selling activity and increase their buying activity in a pronounced manner before repurchase announcements. After the announcement, the differences in insider trading activity between repurchasing firms and non-repurchasing firms are largely insignificant. The results suggest a repurchasing firm’s managers possess little to no private information advantage relative to the market; however, managing insiders trading behavior is consistent with short term profitable opportunities.

Keywords: share repurchases, insider trading, event studies

JEL Classification: G14, G35, L25