Is Price Support for Overvalued Equity a Motive for Increasing Share Repurchases?

45 Pages Posted: 24 Jun 2013 Last revised: 7 Sep 2016

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: March 18, 2016

Abstract

Prior research shows that companies repurchase stock during quarters with low returns, presumably because the stock is undervalued. We focus on repurchase increases and investigate another motive: Are repurchases increased to provide price support for a stock that, despite recent low returns, remains overvalued? Using an increase in short selling to indicate overvaluation, we regress quarterly changes in share repurchases on quarterly changes in short interest. Consistent with price support, the association is positive and statistically significant each year from 2003 to 2014. We find the price support quarter is followed by a sharp multi-quarter decline in ROA (return on assets), but the corresponding decline in EPS (earnings per share) is modest due to the reduction in outstanding shares. Abnormal returns after the price support quarter are positive, indicating that price support is effective. We also examine trading by insiders. While insiders generally sell when shorts sell, they hold onto shares during the price support quarter. This indicates insiders are confident they can maintain the current stock price.

Keywords: short selling, arbitrage, stock repurchases, stock buybacks

JEL Classification: G12, G14, G35

Suggested Citation

Liu, Harrison and Swanson, Edward P., Is Price Support for Overvalued Equity a Motive for Increasing Share Repurchases? (March 18, 2016). Journal of Corporate Finance, June 2016, Vol. 38: 77-91. Available at SSRN: https://ssrn.com/abstract=2283764 or http://dx.doi.org/10.2139/ssrn.2283764

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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