How Do Managers’ Expectations Affect Share Repurchases?

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 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