Institutional Trading around Repurchase Announcements: An Uphill Battle
48 Pages Posted: 25 Mar 2020
Date Written: February 8, 2020
Share repurchase announcements create an asymmetric information environment for institutional investors. The firm and its insiders know the announcement’s timing and enjoy regulatory exemptions from securities law violations for the timing and pricing of share repurchase implementation or lack thereof. Institutions do not have this information ex-ante, unlike insiders. We find that institutions, with the exception of mutual funds, are not profitable in aggregate around the announcement of firms that do not follow through with actual repurchases. Contrastingly, institutions are profitable when firms actually repurchase shares. The difference between the two groups appears to be the varying degrees of mispricing. Firms with a larger degree of mispricing have less information production and create a difficult trading environment for institutions.
Keywords: 13F, repurchase announcement, institutional investor, insiders, mispricing
JEL Classification: D82, G14, G20, G35
Suggested Citation: Suggested Citation