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Managerial Responses to Initial Market Reactions on Share Repurchases

Managerial Responses to Initial Market Reactions on Share Repurchases While most papers in finance literature investigate how the stock market reacts to announcements of corporate events, very few study the opposite, how namely, the manager responds to the information from outside investors. In this paper, we examine this issue, using open market share repurchases. Open market share repurchase offers flexibility for the manager to decide whether or not to buy back shares. Therefore, the manager may refer to the opinions of outside investors and make the decision, based on actual buyback activities. We propose learning, over-confidence and timing hypotheses to interpret the behavior of the managerial response to initial market reaction on the share repurchase announcement. Empirically, if a repurchase announcement abnormal return is low, then the manager tends to achieve the repurchase announced ratio by purchasing more shares. In addition, the investor will positively react to this repurchase in the long run. These empirical findings are consistent with the market timing hypothesis, which implies that managers know the true value of their firms better than the market at the moment of the share repurchase announcement. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Pacific Basin Financial Markets and Policies World Scientific Publishing Company

Managerial Responses to Initial Market Reactions on Share Repurchases

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References (36)

Publisher
World Scientific Publishing Company
Copyright
Copyright ©
ISSN
0219-0915
eISSN
1793-6705
DOI
10.1142/S0219091509001708
Publisher site
See Article on Publisher Site

Abstract

While most papers in finance literature investigate how the stock market reacts to announcements of corporate events, very few study the opposite, how namely, the manager responds to the information from outside investors. In this paper, we examine this issue, using open market share repurchases. Open market share repurchase offers flexibility for the manager to decide whether or not to buy back shares. Therefore, the manager may refer to the opinions of outside investors and make the decision, based on actual buyback activities. We propose learning, over-confidence and timing hypotheses to interpret the behavior of the managerial response to initial market reaction on the share repurchase announcement. Empirically, if a repurchase announcement abnormal return is low, then the manager tends to achieve the repurchase announced ratio by purchasing more shares. In addition, the investor will positively react to this repurchase in the long run. These empirical findings are consistent with the market timing hypothesis, which implies that managers know the true value of their firms better than the market at the moment of the share repurchase announcement.

Journal

Review of Pacific Basin Financial Markets and Policies – World Scientific Publishing Company

Published: Sep 1, 2009

Keywords: Repurchase managerial response market timing

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