Buying High and Selling Low: Stock Repurchases and Persistent Asymmetric Information

65 Pages Posted: 10 Nov 2013 Last revised: 18 Sep 2015

See all articles by Philip Bond

Philip Bond

University of Washington - Michael G. Foster School of Business

Hongda Zhong

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: July 2015

Abstract

We investigate the consequences of allowing for repeated capital market transactions in a model with asymmetric information between a firm and its investors. All firms in the model possess a profitable project that they need to raise cash to undertake. However, equilibria exist in which firms return cash to investors via share repurchases. Consistent with managerial accounts, some firms directly profit from repurchasing their stock. The ultimate source of these profits is that other firms buy “high” in order to improve the terms of subsequent stock issues, which is again consistent with empirical evidence. Only equilibria with repurchases satisfy a mild refinement. Repurchases lower social welfare by reducing the fraction of firms that invest, even though repurchasing itself carries no deadweight cost. Our model generates a number of empirical predictions.

Keywords: Share Repurchase, Share Issuance, Information Asymmetry, Dynamic Signaling

Suggested Citation

Bond, Philip and Zhong, Hongda, Buying High and Selling Low: Stock Repurchases and Persistent Asymmetric Information (July 2015). Available at SSRN: https://ssrn.com/abstract=2352059 or http://dx.doi.org/10.2139/ssrn.2352059

Philip Bond

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Hongda Zhong (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

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