This paper develops and tests a new theoretical explanation for why a firm conducts open-market stock repurchases. Investors may disagree with the manager about the firm’s investment projects. A repurchase causes a change in the investor base as investors who are more likely to disagree with the manager tender their shares. This model leads to the following predictions: first, a firm is more likely to buy back shares when the level of investor-management agreement is low, and second, the level of agreement improves following a repurchase. Our empirical tests provide strong support for these predictions. The results are robust to controls for information asymmetry, diversity of investor opinion, and other factors that may drive a firm’s share repurchase decision. Overall, the evidence is consistent with firms strategically using repurchases to improve alignment between management and shareholders.
Finance and Financial Management | Portfolio and Security Analysis
Financial Intermediation Research Society Conference, 6-8 June 2011, Sydney
City or Country
HUANG, Sheng and Thakor, Anjan.
Investor Heterogeneity, Investor-Management Agreement and Open Market Share Repurchase. (2011). Financial Intermediation Research Society Conference, 6-8 June 2011, Sydney. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3184