The Credibility of Open Market Share Repurchase Signaling
63 Pages Posted: 27 Mar 2006 Last revised: 3 May 2013
Date Written: October 1, 2012
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: Suggested Citation