Share Repurchases, Undervaluation, and Corporate Social Responsibility

Abstract

Share repurchases have experienced growing popularity in recent years. The wealth transfer between shareholders associated with share repurchases has however been widely neglected in the literature, yet. Since managers are free to time repurchases so that ongoing shareholders profit at the expense of selling shareholders or vice versa, we investigate how the wealth transfer from share repurchases relates to a firm’s priorities regarding its stakeholder orientation. Based on the idea that firms with higher corporate social responsibility (CSR) performance are less shareholder oriented, we posit that their managers are less inclined to take ad-vantage 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 CSR performance announce their repurchases in periods of ceteris paribus lower undervaluation. This result also shows that managers are aware of the exploitation of selling shareholders occurring with most buybacks.

Keywords: share repurchase, corporate social responsibility, misvaluation

JEL Classification: G15, G35, M14