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Does CEO bias escalate repurchase activity?

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  • Banerjee, Suman
  • Humphery-Jenner, Mark
  • Nanda, Vikram

Abstract

We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.

Suggested Citation

  • Banerjee, Suman & Humphery-Jenner, Mark & Nanda, Vikram, 2018. "Does CEO bias escalate repurchase activity?," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 105-126.
    • Handle: RePEc:eee:jbfina:v:93:y:2018:i:c:p:105-126
    DOI: 10.1016/j.jbankfin.2018.02.003
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    More about this item

    Keywords

    Overconfidence; Repurchases; Dividend-repurchase substitution; Investment-repurchase substitution; Corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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