Does CEO Bias Escalate Repurchase Activity?

62 Pages Posted: 20 May 2013 Last revised: 14 Feb 2018

See all articles by Suman Banerjee

Suman Banerjee

Stevens Institute of Technology; Stevens Institute of Technology

Mark Humphery-Jenner

UNSW Business School; Financial Research Network (FIRN)

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: January 25, 2018

Abstract

We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.

Keywords: CEO overconfidence, Dividend-repurchase substitution, Investment-repurchase substitution, Market reaction to repurchases

JEL Classification: G32, G35

Suggested Citation

Banerjee, Suman and Humphery-Jenner, Mark and Nanda, Vikram K., Does CEO Bias Escalate Repurchase Activity? (January 25, 2018). Journal of Banking and Finance, Forthcoming; 26th Australasian Finance and Banking Conference 2013; UNSW Australian School of Business Research Paper No. 2013 BFIN 04; Stevens Institute of Technology School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2267218 or http://dx.doi.org/10.2139/ssrn.2267218

Suman Banerjee

Stevens Institute of Technology ( email )

525 River Street
Hoboken, NJ 07030
United States
2012613689 (Phone)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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