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Open Market Stock Repurchase Signaling

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

This paper presents a signaling model of open market repurchases that simulates the effects of a repurchase on the insiders' utility. If insiders refrain from tendering, then they are exposed to more risk. If insiders are risk averse, then the market can draw several inferences regarding the insiders' expectations of their firm's future earnings: 1) firms that repurchase more have higher earnings; 2) holding the repurchase proportion constant, riskier firms have higher earnings; and 3) holding proportion constant, firms where insiders have a greater ownership stake have higher earnings. I test the model's implications with a sample of over 700 US repurchases and find support for all three.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1963CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION 1977INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION 1985Dividend Policy under Asymmetric Information 1987Signaling Games and Stable Equilibria 2020A Course in Microeconomic Theory 1989Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings 1989Free Cash Flow and Stockholder Gains in Going Private Transactions

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2008Handbook of Financial Engineering 2014The market valuation of share repurchases in Europe 2013Information disclosure, CEO overconfidence, and share buyback completion rates 2007The information content of Canadian open market repurchase announcements 2003Stock price behavior surrounding stock repurchase announcements: Evidence from Japan 2009Share Repurchases, the Clustering Problem, and the Free Cash Flow Hypothesis

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