The Share Repurchase Announcement Puzzle: Theory and Evidence

46 Pages Posted: 2 Jan 2001 Last revised: 30 Apr 2015

See all articles by Utpal Bhattacharya

Utpal Bhattacharya

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management

Stacey E. Jacobsen

Southern Methodist University (SMU) - Finance Department

Date Written: April 20, 2015

Abstract

Why is the mere announcement of an open-market share repurchase program, which involves no commitment to purchase shares, regarded as good news by the market? The first part of this paper provides a theoretical model to resolve this puzzle. The model predicts that firms with large underpricing can attract attention by announcing repurchases, and these firms do not have to use costly share repurchases as a value-correcting signal, because the trades from speculators lead to value corrections. Firms with small underpricing, however, cannot attract attention by announcing repurchases, and these firms have to use costly share repurchases as a value-correcting signal. The second part of the paper finds empirical evidence in favor of the predictions of the theoretical model.

Keywords: Cheap talk, costly signal, share repurchases

JEL Classification: D80, G14, G30

Suggested Citation

Bhattacharya, Utpal and Jacobsen, Stacey E., The Share Repurchase Announcement Puzzle: Theory and Evidence (April 20, 2015). Review of Finance, Forthcoming; Kelley School of Business Research Paper No. 2014-45. Available at SSRN: https://ssrn.com/abstract=250049 or http://dx.doi.org/10.2139/ssrn.250049

Utpal Bhattacharya (Contact Author)

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Stacey E. Jacobsen

Southern Methodist University (SMU) - Finance Department ( email )

United States

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