Informed Trading and False Signaling with Open Market Repurchases

63 Pages Posted: 21 Oct 2005 Last revised: 3 Feb 2014

See all articles by Jesse M. Fried

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)


Public companies in the United States and elsewhere increasingly use open market stock buybacks, rather than dividends, to distribute cash to shareholders. Academic commentators have emphasized the possible benefits of such repurchases for shareholders. However, little attention has been paid to their potential drawbacks. This Article shows that managers use open market repurchases to indirectly buy stock for themselves at a bargain price. Managers also boost stock prices by announcing repurchase programs they do not intend to execute, enabling them to unload their own shares at a higher price. Such bargain repurchases and inflated-price sales systematically transfer significant amounts of value from public investors to managers, as well as distort managers' payout decisions. The Article concludes by proposing a new approach to regulating open market repurchases: requiring firms to disclose specific details of their buy orders in advance. This pre-repurchase disclosure rule, the Article shows, would undermine managers' ability to use repurchases for informed trading and false signaling, thereby reducing the resulting distortions and costs to shareholders. Moreoever, it would achieve these objectives without eroding any of the potential benefits of repurchases.

Keywords: Payout policy, stock repurchases, dividends, signaling, insider trading

JEL Classification: G30, G32, G35, G38

Suggested Citation

Fried, Jesse M., Informed Trading and False Signaling with Open Market Repurchases. California Law Review, Vol. 93, pp. 1323-1386, October 2005, Available at SSRN:

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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