Investor Heterogeneity, Investor-Management Disagreement, and Share Repurchases

Review of Financial Studies 26(10), p2453-2491, 2013

ECGI - Finance Working Paper No. 367/2013

64 Pages Posted: 31 Mar 2013 Last revised: 16 Dec 2014

See all articles by Sheng Huang

Sheng Huang

China Europe International Business School (CEIBS)

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Date Written: April 1, 2013

Abstract

This paper develops and tests a new theoretical explanation for why a firm conducts open-market and privately-negotiated 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 lower. Second, the level of agreement improves following a repurchase. Third, once the stock price and investor-management agreement are controlled for, dispersion of opinion among investors cannot explain repurchase activity. Our empirical tests provide strong support for these predictions. The results are robust to controls for information asymmetry 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

Huang, Sheng and Thakor, Anjan V., Investor Heterogeneity, Investor-Management Disagreement, and Share Repurchases (April 1, 2013). Review of Financial Studies 26(10), p2453-2491, 2013, ECGI - Finance Working Paper No. 367/2013, Available at SSRN: https://ssrn.com/abstract=2241735 or http://dx.doi.org/10.2139/ssrn.2241735

Sheng Huang

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Anjan V. Thakor (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

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

Financial Theory Group ( email )

United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

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