Does Share Repurchase Increase the Financial Fragility? Evidence from a Regression-Discontinuity Approach

Posted: 23 Apr 2021

See all articles by Chris Lien

Chris Lien

University of Illinois- Urbana Champaign

Darcy Pu

London Business School

Date Written: April 14, 2021

Abstract

This paper studies the agency costs associated with the open-market repurchase program and documents its real financial consequences. Specifically, we look at the role of a manager’s behavioral bias in making repurchase decisions. We find that the likelihood of open-market repurchase jumps discontinuously when the stock price equals the previous repurchase price. The anchoring effect holds after considering other fundamental determinants. After identifying this discontinuity, we then use a fuzzy regression discontinuity design based on this cutoff, which exploits the local randomness in stock price, to study the consequences of anchoring in share repurchases. We find that anchoring-driven repurchase leads to aggressive investment (investment, R&D) but poor financial performance (ROA, earning growth) and deteriorated financial health (more debt, lower credit rating upgrade probability). Overall, we provide some of the cleanest estimates, to date, of the agency cost and financial consequence of the open-market repurchase program. Our results highlight the non-contractable agency cost associated with the share repurchase program.

Keywords: Financial Fragility, Share Repurchase

JEL Classification: G35

Suggested Citation

Lien, Chris and Pu, Darcy, Does Share Repurchase Increase the Financial Fragility? Evidence from a Regression-Discontinuity Approach (April 14, 2021). Available at SSRN: https://ssrn.com/abstract=3826007

Chris Lien (Contact Author)

University of Illinois- Urbana Champaign ( email )

601 E John St
Champaign, IL Champaign 61820
United States

Darcy Pu

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

HOME PAGE: http://www.london.edu/phd/profiles/darcy-pu

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