How Do Managers’ Expectations Affect Share Repurchases?

Fisher College of Business Working Paper No. 2023-03-005

Charles A. Dice Center Working Paper No. 2023-05

59 Pages Posted: 3 Apr 2023 Last revised: 21 Dec 2023

Date Written: November 30, 2023

Abstract

It is widely believed that undervaluation is an important determinant of share repurchases. However, empirical evidence on undervaluation remains mixed. This paper considers a novel measure of undervaluation that relies on the difference between management earnings forecasts and the corresponding consensus analyst forecasts. It finds that firms repurchase significantly more shares when they expect higher future earnings relative to market expectations, which is consistent with the undervaluation hypothesis. This finding holds regardless of the level of underlying valuations. The results do not appear to be driven by managerial misvaluation or bias. Rather, my findings suggest that firms utilize insider information to time the market with respect to share repurchase decisions.

Keywords: Payout policy, share repurchases, management earnings forecasts

JEL Classification: G35, G41

Suggested Citation

Ko, Minsu, How Do Managers’ Expectations Affect Share Repurchases? (November 30, 2023). Fisher College of Business Working Paper No. 2023-03-005, Charles A. Dice Center Working Paper No. 2023-05, Available at SSRN: https://ssrn.com/abstract=4405300 or http://dx.doi.org/10.2139/ssrn.4405300

Minsu Ko (Contact Author)

Monash University ( email )

29 Ancora Impala, Clayton Campus, Building 6, Offi
Clayton, Victoria 3800
Australia

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