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Is Price Support for Overvalued Equity a Motive for Increasing Share Repurchases?

Author

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  • Harrison Liu

    (UTSA)

  • Edward P. Swanson

Abstract

Economy-wide, corporate share repurchases increase at market tops, suggesting that price support for overvalued equity could be a motive for repurchasing stock. We investigate this possibility using short selling as a proxy for sophisticated investors’ beliefs about firm valuation. Regressing changes in share repurchases on changes in short interest (and control variables), we find a robust positive association, which is consistent with price support being a significant motive for increasing share repurchases. Examining the subsequent two years, companies with increases in short interest accompanying an increase in repurchases experience a sizable decline in profitability, liquidity, and stock price.

Suggested Citation

  • Harrison Liu & Edward P. Swanson, 2015. "Is Price Support for Overvalued Equity a Motive for Increasing Share Repurchases?," Working Papers 0171acc, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0171acc
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    More about this item

    Keywords

    overvalued equity; share repurchases;

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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