What is it about?
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.
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Why is it important?
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? This is a big puzzle. This is the first paper that resolves this puzzle with a theoretical explanation, and then tests the implications of the theory.
Perspectives
My coauthor is the empiricist and I am the theorist, and I am lucky we worked so well together on this paper.
Professor Utpal Bhattacharya
Hong Kong University of Science and Technology
Read the Original
This page is a summary of: The Share Repurchase Announcement Puzzle: Theory and Evidence, Review of Finance, May 2015, Oxford University Press (OUP),
DOI: 10.1093/rof/rfv020.
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