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Open Market Stock Repurchase Signaling

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  • William J. McNally
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    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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    Bibliographic Info

    Article provided by Financial Management Association in its journal Financial Management.

    Volume (Year): 28 (1999)
    Issue (Month): 2 (Summer)
    Pages:

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    Handle: RePEc:fma:fmanag:mcnally99

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    Cited by:
    1. Andriosopoulos, Dimitris & Andriosopoulos, Kostas & Hoque, Hafiz, 2013. "Information disclosure, CEO overconfidence, and share buyback completion rates," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5486-5499.
    2. Hatakeda, Takashi & Isagawa, Nobuyuki, 2004. "Stock price behavior surrounding stock repurchase announcements: Evidence from Japan," Pacific-Basin Finance Journal, Elsevier, vol. 12(3), pages 271-290, June.
    3. Andreas Hackethal & Alexandre Zdantchouk, 2006. "Signaling Power of Open Market Share Repurchases in Germany," Financial Markets and Portfolio Management, Springer, vol. 20(2), pages 123-151, June.
    4. Foued Hamouda & Mounira Ben Arab, 2013. "Board of directors and insider trading with share repurchase programs," Journal of Management and Governance, Springer, vol. 17(2), pages 405-418, May.
    5. Estrella, Arturo, 2004. "The cyclical behavior of optimal bank capital," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1469-1498, June.
    6. Ayuso, Juan & Perez, Daniel & Saurina, Jesus, 2004. "Are capital buffers pro-cyclical?: Evidence from Spanish panel data," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 249-264, April.
    7. Jung, Sung-Chang & Lee, Yong-Gyo & Thornton, John Jr., 2005. "An empirical comparison between operations of stabilization funds and stock repurchases in Korea," Pacific-Basin Finance Journal, Elsevier, vol. 13(3), pages 319-341, June.
    8. Ken Yook & Partha Gangopadhyay, 2011. "A comprehensive examination of the wealth effects of recent stock repurchase announcements," Review of Quantitative Finance and Accounting, Springer, vol. 37(4), pages 509-529, November.
    9. Andriosopoulos, Dimitris & Hoque, Hafiz, 2013. "The determinants of share repurchases in Europe," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 65-76.
    10. Cheng, Su-Yin & Hou, Han, 2013. "The information content of open-market repurchase announcements in Taiwan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 59-75.
    11. Johannes A. Skjeltorp & Bernt Arne Ƙdegaard, 2004. "The ownership structure of repurchasing firms," Working Paper 2004/7, Norges Bank.

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