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When is Market the Benchmark? Reinforcement Evidence from Repurchase Decisions

Author

Listed:
  • Peiran Jiao

    () (Department of Economics, University of Oxford)

  • Heinrich H. Nax

    () (Computational Social Sciences, ETH Zürich)

Abstract

Reinforcement relative to an adaptive benchmark is a well-established model of behavior outside finance. Recently, reinforcement has been identified as an important driver of decisions to repurchase a stock. In this paper, we enrich the existing reinforcement model of repurchasing by an aspiration-based market benchmark. When choosing which stock to repurchase, investors’ sources of reinforcement are weighted averages of absolute returns from previous sales and relative returns with respect to a market benchmark. The weights change according to market environments. We empirically identify the following crucial asymmetry that cannot be reconciled by simple reinforcement strategy, but is consistent with the model we propose: investors place more weight on relative returns when the market is performing well, and place more weight on absolute returns when the market is performing badly

Suggested Citation

  • Peiran Jiao & Heinrich H. Nax, 2016. "When is Market the Benchmark? Reinforcement Evidence from Repurchase Decisions," Economics Papers 2016-W01, Economics Group, Nuffield College, University of Oxford.
  • Handle: RePEc:nuf:econwp:1601
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    References listed on IDEAS

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    More about this item

    Keywords

    Reinforcement; Stock Repurchasing; Aspiration Adjustment;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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