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Buying High and Selling Low: Stock Repurchases and Persistent Asymmetric Information

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  • Philip Bond
  • Hongda Zhong

Abstract

Share prices generally fall when a firm announces a seasoned equity offering (SEO). A standard explanation is that an SEO communicates negative information to investors. We show that if repeated capital market transactions are possible, this same asymmetry of information between firms and investors implies that some firms also repurchase shares in equilibrium. A subset of these firms directly profit from repurchases, while other firms repurchase in order to improve the terms of a subsequent SEO. The possibility of repurchases reduces both SEOs and investment. Overall, our analysis highlights the importance of analyzing SEOs and repurchases in a unified framework.

Suggested Citation

  • Philip Bond & Hongda Zhong, 2016. "Buying High and Selling Low: Stock Repurchases and Persistent Asymmetric Information," The Review of Financial Studies, Society for Financial Studies, vol. 29(6), pages 1409-1452.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:6:p:1409-1452.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw005
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    Citations

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    Cited by:

    1. Cziraki, Peter & Lyandres, Evgeny & Michaely, Roni, 2021. "What do insiders know? Evidence from insider trading around share repurchases and SEOs," Journal of Corporate Finance, Elsevier, vol. 66(C).
    2. Lannoo, Karel & Thomadakis, Apostolos, 2019. "Rebranding Capital Markets Union: A market finance action plan," ECMI Papers 500, Centre for European Policy Studies.
    3. Saeed Md. Abdullah & Simon Zaby, 2021. "Seasoned Equity Offerings and Differences in Share-Price Impact by Firm Categories," IJFS, MDPI, vol. 9(3), pages 1-10, July.
    4. Mike Burkart & Samuel Lee, 2016. "Smart Buyers," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(2), pages 239-270.
    5. Gyoshev, Stanley B. & Kaplan, Todd R. & Szewczyk, Samuel H. & Tsetsekos, George P., 2021. "Why do investment banks buy put options from companies?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    6. Soeren Johansen & Anders Rygh Swensen, 2021. "Adjustment coefficients and exact rational expectations in cointegrated vector autoregressive models," Discussion Papers 21-07, University of Copenhagen. Department of Economics.
    7. Starkov, Egor, 2023. "Only time will tell: Credible dynamic signaling," Journal of Mathematical Economics, Elsevier, vol. 109(C).
    8. Ye, Dezhu & Deng, Jie & Liu, Yi & Szewczyk, Samuel H. & Chen, Xiao, 2019. "Does board gender diversity increase dividend payouts? Analysis of global evidence," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 1-26.
    9. Mei-Chih Wang & Pao-Lan Kuo & Chan-Sheng Chen & Chien-Liang Chiu & Tsangyao Chang, 2020. "Yield Spread and Economic Policy Uncertainty: Evidence from Japan," Sustainability, MDPI, vol. 12(10), pages 1-14, May.
    10. Ordoñez, Guillermo & Perez-Reyna, David & Yogo, Motohiro, 2019. "Leverage dynamics and credit quality," Journal of Economic Theory, Elsevier, vol. 183(C), pages 183-212.
    11. Steinberg, Nadav & Wohl, Avi, 2024. "Market timing in open market bond repurchases," Journal of Banking & Finance, Elsevier, vol. 161(C).

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