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The Share Repurchase Announcement Puzzle: Theory and Evidence

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  • Utpal Bhattacharya
  • Stacey E. Jacobsen

Abstract

Why is the mere announcement of an open-market share repurchase program, which involves no commitment to purchase shares, regarded as good news by the market? We develop a theoretical model to resolve this puzzle. The model predicts that firms with large underpricing can attract attention from speculators by announcing repurchases, and the subsequent trades from these speculators lead to value corrections. Firms with small underpricing, however, cannot attract attention by announcing repurchases, and these firms have to use costly share repurchases as a value-correcting signal. We then provide empirical evidence corroborating the predictions of the theoretical model.

Suggested Citation

  • Utpal Bhattacharya & Stacey E. Jacobsen, 2016. "The Share Repurchase Announcement Puzzle: Theory and Evidence," Review of Finance, European Finance Association, vol. 20(2), pages 725-758.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:2:p:725-758.
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    File URL: http://hdl.handle.net/10.1093/rof/rfv020
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    References listed on IDEAS

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    1. Brennan, Michael J & Thakor, Anjan V, 1990. "Shareholder Preferences and Dividend Policy," Journal of Finance, American Finance Association, vol. 45(4), pages 993-1018, September.
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    4. Murali Jagannathan & Clifford Stephens, 2003. "Motives for Multiple Open-Market Repurchase Programs," Financial Management, Financial Management Association, vol. 32(2), Summer.
    5. Lee, D Scott & Mikkelson, Wayne H & Partch, M Megan, 1992. "Managers' Trading around Stock Repurchases," Journal of Finance, American Finance Association, vol. 47(5), pages 1947-1961, December.
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    Cited by:

    1. Tsai, Pei-Ling & Hsu, Yuan-Lin & Chih, Hsiang-Hsuan & Lin, Shih-Kuei, 2022. "Theoretical and empirical analysis of options in open market share repurchases of Taiwan companies," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 205-226.
    2. Bong Soo Lee & Nathan Mauck, 2018. "Informed Repurchases, Information Asymmetry and the Market Response to Open Market Share Repurchases," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(03), pages 1-32, September.
    3. Feng, Yitian, 2023. "Do listed companies fulfill their public commitments? Evidence from the stake-raising commitments of Chinese companies," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    4. Vinh Huy Nguyen & Suchismita Mishra & Pankaj K. Jain, 2022. "Institutional trading around repurchase announcements: An uphill battle," The Financial Review, Eastern Finance Association, vol. 57(3), pages 485-507, August.
    5. Dong, Linjia & Nishihara, Michi & Yang, Zhaojun, 2023. "Two-stage investment, loan guarantees and share buybacks," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).
    6. María Gutiérrez & Nino Papiashvili & Josep A. Tribó & Antonio B. Vazquez, 2020. "Managerial incentives for attracting attention," European Financial Management, European Financial Management Association, vol. 26(4), pages 896-937, September.
    7. Ota, Koji & Lau, David & Kawase, Hironori, 2022. "Signal strength adjustment behavior: Evidence from share repurchases," Journal of Banking & Finance, Elsevier, vol. 143(C).
    8. Evgeniou, Theodoros & de Fortuny, Enric Junqué & Nassuphis, Nick & Vermaelen, Theo, 2018. "Volatility and the buyback anomaly," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 32-53.
    9. Hou, Han, 2024. "Does the credibility of open market share repurchase matter?," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 280-297.
    10. Autore, Don M. & Jiang, Danling, 2019. "The preholiday corporate announcement effect," Journal of Financial Markets, Elsevier, vol. 45(C), pages 61-82.
    11. Dayanandan, Ajit & Donker, Han & Kuntluru, Sudershan & Nofsinger, John, 2020. "Share buybacks in India," Research in International Business and Finance, Elsevier, vol. 54(C).
    12. Cheong, Chee Seng & Yu, Chia-Feng (Jeffrey) & Zurbruegg, Ralf & Brockman, Paul, 2021. "Tournament incentives and institutional ownership," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 418-433.
    13. Burak Pirgaip, 2021. "Pan(dem)ic reactions in Turkish stock market: evidence from share repurchases," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(2), pages 381-402, June.
    14. Chen, Ni-Yun & Liu, Chi-Chun, 2019. "Open-market block share repurchases probability, frequency and timing," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 278-296.

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