The Credibility of Open Market Share Repurchase Signaling

63 Pages Posted: 27 Mar 2006 Last revised: 3 May 2013

Ilona Babenko

Arizona State University

Yuri Tserlukevich

Arizona State University (ASU)

Alexander Vedrashko

Simon Fraser University - Beedie School of Business

Date Written: October 1, 2012

Abstract

Open market share repurchase announcements are commonly associated with equity undervaluation, but their signal about firm value can often be misleading. We conjecture that executives who buy shares of their firm before an announcement add credibility to the undervaluation signal. Consistent with this hypothesis, we find that announcement returns are positively related to past insider purchases, especially for firms that are priced less efficiently. Firms whose insiders bought more shares are also more likely to complete their repurchase plans. Finally, we find that insider purchases predict post-announcement stock returns.

Keywords: Payout Policy, Open Market Share Repurchases, Insider Trading, Managerial Stock Ownership, Signaling

JEL Classification: G35, G32, G30

Suggested Citation

Babenko, Ilona and Tserlukevich, Yuri and Vedrashko, Alexander, The Credibility of Open Market Share Repurchase Signaling (October 1, 2012). 2012, Journal of Financial and Quantitative Analysis, 47 (5), 1059-1088.. Available at SSRN: https://ssrn.com/abstract=891761

Ilona Babenko

Arizona State University ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Yuri Tserlukevich

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Alexander Vedrashko (Contact Author)

Simon Fraser University - Beedie School of Business ( email )

Beedie School of Business
8888 University Dr.
Burnaby, British Columbia V5A1S6
Canada
778-782-3471 (Phone)

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