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The Effect of Unsuccessful Past Repurchases on Future Repurchasing Decisions

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  • Geoffrey C. Friesen

    (College of Business Administration, University of Nebraska-Lincoln, Lincoln, Nebraska 68588)

  • Noel Pavel Jeutang

    (Beacom School of Business, University of South Dakota, Vermillion, South Dakota 57069)

  • Emre Unlu

    (College of Business Administration, University of Nebraska-Lincoln, Lincoln, Nebraska 68588)

Abstract

We find that managers are less likely to repurchase stocks when they lose money on past stock repurchases but find no robust evidence that past gains on repurchases influence future repurchasing activity. This asymmetric sensitivity is strongest for young CEOs and those with the shortest tenure. Also, future repurchases are more sensitive to past repurchase losses for CEOs whose previous lifetime experience with the stock market is unfavorable. The sensitivity of future repurchases to past losses costs firms, on average, about 3.7% per year. When this cost is decomposed into systematic and idiosyncratic components, we find that nearly half (1.8%) comes from mistiming idiosyncratic shocks. Past losses on repurchases have a significant and negative impact on the CEO’s future bonus and increase the likelihood that future CEO termination is involuntary. We also find that negative outcomes from past repurchases encourage the subsequent use of dividends. Our findings suggest that outcomes of past repurchases have economically significant consequences through both nonbehavioral (career concerns) and behavioral (snakebite effect) factors.

Suggested Citation

  • Geoffrey C. Friesen & Noel Pavel Jeutang & Emre Unlu, 2022. "The Effect of Unsuccessful Past Repurchases on Future Repurchasing Decisions," Management Science, INFORMS, vol. 68(1), pages 716-739, January.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:1:p:716-739
    DOI: 10.1287/mnsc.2020.3875
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    1. Nicholas Clarke & Dylan Norris & Andrew Schrowang, 2024. "Share repurchases and managerial reference points," The Financial Review, Eastern Finance Association, vol. 59(1), pages 57-87, February.

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