Share Repurchases, Undervaluation, and Stakeholder Orientation

Abstract

This paper investigates how firms’ stakeholder orientation relates to the timing of share repurchases with respect to share mispricing and the corresponding wealth transfer between selling and ongoing shareholders. Based on the idea that firms with higher stakeholder orientation take the interests of all stakeholders into more equal consideration, we posit that their managers are less inclined to take advantage of the wealth transfer from selling to ongoing shareholders, which occurs if the firm is undervalued. Consistent with this notion, our results show that firms with higher corporate social responsibility (CSR) engagement announce their repurchases in periods of ceteris paribus lower undervaluation. Tackling the endogenous nature of CSR, we confirm this result using a proxy of stakeholder orientation at the country-level. Overall, our results provide insights into the motives behind share repurchases and demonstrate that stakeholder orientation is relevant for how managers consider the wealth transfer between groups of shareholders.

Keywords: share repurchase, corporate social responsibility, misvaluation, stakeholder orientation

JEL Classification: G15, G35, M14