Open-Market Repurchase Announcements and Stock Price Behavior in Inefficient Markets

Abstract

I ask why a firm would choose to buy back its outstanding shares after the stock price goes up in response to an open-market repurchase announcement. I introduce the subject of market inefficiency and establish a signaling equilibrium that does not assume that an announcement of open-market repurchase represents a commitment. Since the firm can earn capital gains by buying its outstanding shares at a bargain price, it has a strong incentive to execute stock repurchases even after it announces repurchase intention. Empirically, my model predicts positive long-run stock return performance and positive announcement effects following open-market repurchase announcements.

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