Investor Heterogeneity, Investor-Management Disagreement and Open Market Share Repurchases

• Main Authors: HUANG, Sheng, Thakor, Anjan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: stock repurchase; corporate payout; agreement; investor heterogeneity; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3182; https://www.huangjk.info/pdf/Repurchase_06-2010.pdf
• Institution: Singapore Management University

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 may 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, the post-repurchase agreement improves. Our empirical tests provide strong support for these predictions. The results are robust to controls for information asymmetry, diversity of opinion among investors, 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.