Investor Heterogeneity, Investor-Management Agreement and Open Market Share Repurchase

Publication Type

Conference Paper

Publication Date



This paper develops a new theoretical explanation for why a firm conducts open market stock repurchases, tests the main predictions associated with this explanation and finds empirical evidence in support. Investors disagree with the manager about the firm’s investment projects. A repurchase causes a change in the investor base as investors who are less prone to agree with the manager tender their shares. The model thus has the following predictions. First, a firm is more likely to buy back shares when the level of investor-management agreement is lower. Second, controlling for the amount spent in the repurchase, the higher the pre-repurchase agreement parameter, the smaller is the post-repurchase improvement in agreement. Our empirical tests provide strong support for these predictions. The results are robust to controls for prior stock returns, permanent and temporary cash flows, and other factors that may drive a firm’s share repurchase decision. Overall, the evidence is consistent with a repurchase being a strategic payout mode intended to improve alignment between management and shareholders.


Finance and Financial Management | Portfolio and Security Analysis


China International Conference in Finance