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The Credibility of Open Market Share Repurchase Signaling

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  • Babenko, Ilona
  • Tserlukevich, Yuri
  • Vedrashko, Alexander

Abstract

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.

Suggested Citation

  • Babenko, Ilona & Tserlukevich, Yuri & Vedrashko, Alexander, 2012. "The Credibility of Open Market Share Repurchase Signaling," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(05), pages 1059-1088, October.
  • Handle: RePEc:cup:jfinqa:v:47:y:2012:i:05:p:1059-1088_00
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    1. repec:bla:jfnres:v:40:y:2017:i:3:p:287-313 is not listed on IDEAS
    2. Michaely, Roni & Rubin, Amir & Vedrashko, Alexander, 2016. "Are Friday announcements special? Overcoming selection bias," Journal of Financial Economics, Elsevier, vol. 122(1), pages 65-85.
    3. Harrison Liu & Edward P. Swanson, 2015. "Is Price Support for Overvalued Equity a Motive for Increasing Share Repurchases?," Working Papers 0171acc, College of Business, University of Texas at San Antonio.
    4. Lee, Bong Soo & Mauck, Nathan, 2014. "Information Asymmetry and the Market Response to Open Market Share Repurchases," MPRA Paper 54066, University Library of Munich, Germany.
    5. Liang, Woan-lih, 2016. "Sensitivity to investor sentiment and stock performance of open market share repurchases," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 75-94.
    6. Liu, Harrison & Swanson, Edward P., 2016. "Is price support a motive for increasing share repurchases?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 77-91.
    7. Francis, Bill & Hasan, Iftekhar & Li, Lingxiang, 2015. "Evidence for the existence of downward real earnings management," Research Discussion Papers 13/2015, Bank of Finland.
    8. repec:eee:ecofin:v:44:y:2018:i:c:p:254-264 is not listed on IDEAS
    9. 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.
    10. repec:bof:bofrdp:urn:nbn:fi:bof-201508131351 is not listed on IDEAS
    11. Andriosopoulos, Dimitris & Lasfer, Meziane, 2015. "The market valuation of share repurchases in Europe," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 327-339.
    12. Dittmar, Amy & Field, Laura Casares, 2015. "Can managers time the market? Evidence using repurchase price data," Journal of Financial Economics, Elsevier, vol. 115(2), pages 261-282.
    13. Li, Lingxiang, 2016. "New findings on repurchase anomaly — The first-month effect," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 331-349.
    14. Cziraki, Peter & Laux, Christian & Lóránth, Gyöngyi, 2016. "Understanding Bank Payouts during the Crisis of 2007-2009," CEPR Discussion Papers 11453, C.E.P.R. Discussion Papers.
    15. Huang, Chia-Wei, 2015. "Takeover vulnerability and the credibility of signaling: The case of open-market share repurchases," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 405-417.
    16. Caton, Gary L. & Goh, Jeremy & Lee, Yen Teik & Linn, Scott C., 2016. "Governance and post-repurchase performance," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 155-173.
    17. Azi Ben-Rephael & Jacob Oded & Avi Wohl, 2014. "Do Firms Buy Their Stock at Bargain Prices? Evidence from Actual Stock Repurchase Disclosures," Review of Finance, European Finance Association, vol. 18(4), pages 1299-1340.
    18. Hillert, Alexander & Maug, Ernst & Obernberger, Stefan, 2016. "Stock repurchases and liquidity," Journal of Financial Economics, Elsevier, vol. 119(1), pages 186-209.
    19. Hsuan-Chi Chen & Sheng-Syan Chen & Chia-Wei Huang & John D. Schatzberg, 2014. "Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 156-184, January.
    20. Lin, Ji-Chai & Stephens, Clifford P. & Wu, YiLin, 2014. "Limited attention, share repurchases, and takeover risk," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 283-301.

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