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Open-Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment

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  • Isagawa, Nobuyuki

Abstract

This paper provides a simple explanation of open-market stock repurchases and the stock price behavior surrounding them. There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open-market repurchase announcements reveal information about the managers' private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open-market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open-market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts. Copyright 2000 by MIT Press.

Suggested Citation

  • Isagawa, Nobuyuki, 2000. "Open-Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment," The Financial Review, Eastern Finance Association, vol. 35(4), pages 95-108, November.
    • Handle: RePEc:bla:finrev:v:35:y:2000:i:4:p:95-108
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    Cited by:

    1. Gunnar Bårdsen & Jurgen Doornik & Jan Tore Klovland, 2004. "A European-type wage equation from an American-style labor market: Evidence from a panel of Norwegian manufacturing industries in the 1930s," Working Paper 2004/4, Norges Bank.
    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. Lee, Chien-Chiang & Park, Bokyung & Wang, Chih-Wei, 2023. "The effect of asymmetric information disappears: Evidence in share repurchases and market efficiency," Finance Research Letters, Elsevier, vol. 56(C).
    4. Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2004. "The ownership structure of repurchasing firms," Working Paper 2004/7, Norges Bank.
    5. R. L. Hyderabad, 2009. "Price Performance following Share Buyback Announcements in India," Vision, , vol. 13(1), pages 59-78, January.
    6. Chih‐Wei Wang & Jing‐Yu Peng, 2021. "The impact of internal and external factors on the relationship between information opacity and open‐market repurchases," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4085-4118, September.

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