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Working Paper

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We study how institutional investors trade when firms buy back shares. We find that institutions sell following share repurchase announcements. The institutional sell-off results in a more concentrated ownership by institutions, as the number of institutions in the investor base declines after accounting for the change in the universe of institutions. While some institutions sell shares passively to meet the firm demand for the market to clear, the overall institutional sell-off only accounts for 27% of shares bought back contemporaneously by firms. Many firms experience a net inflow of institutional investment. The institutional sell-off is greater in firms that experience weaker recent stock performance, display more information uncertainty, have higher institutional ownership, and conduct ill-timed/motivated repurchases that are not endorsed by institutions. And most of the sell-off comes from institutions active in trading. We decompose the future returns of institutional trading into liquidity provision and information components, and find that the returns are attributed solely to information. Institutional buying is more informative of the future returns than institutional sell-off, especially in firms with greater information asymmetry. But this return predictability decays over time. Our findings have important implications for firms’ cash payout policy and shed light on institutional trading behavior around voluntary corporate events.


Finance and Financial Management

Research Areas