Share Repurchases on Trial: Large-Sample Evidence on Share Price Performance, Executive Compensation, and Corporate Investment

Forthcoming at Financial Management

41 Pages Posted: 20 Jul 2022 Last revised: 29 Jan 2023

See all articles by Nicholas M. Guest

Nicholas M. Guest

Cornell University - Samuel Curtis Johnson Graduate School of Management

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Parth Venkat

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: January 17, 2023

Abstract

Using a large sample of US stocks covering more than three decades, we empirically examine common criticisms of and rationales for stock repurchases. Repurchases account for a tiny fraction of the trading volume in a typical stock, making their price impact too small to generate short-term price manipulation. Price appreciation following repurchases is modest and does not reverse on average, suggesting the small price increases following repurchases signal firms’ good prospects. Also, we find no evidence that CEOs of repurchasing firms are paid excessively or that repurchases crowd out valuable investment opportunities. Because repurchases do not appear to be systematically abusive, enforcement action should be sufficient to deal with any bad actors, and significant regulation seems unwarranted.

Keywords: Corporate finance, payout policy, share repurchase, trading volume, stock prices, CEO pay, investment, profitability

JEL Classification: G12, G31, G32, G35, G38

Suggested Citation

Guest, Nicholas M. and Kothari, S.P. and Venkat, Parth, Share Repurchases on Trial: Large-Sample Evidence on Share Price Performance, Executive Compensation, and Corporate Investment (January 17, 2023). Forthcoming at Financial Management, Available at SSRN: https://ssrn.com/abstract=4149796 or http://dx.doi.org/10.2139/ssrn.4149796

Nicholas M. Guest (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

342 Sage Hall
Ithaca, NY 14853
United States

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Parth Venkat

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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