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

• Main Authors: HUANG, Sheng, THAKOR, Anjan V.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• 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/3184; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4183/viewcontent/HuangSZheInvestorRepurchase_06_2010.pdf
• Institution: Singapore Management University

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.