Investor Heterogeneity, Investor-Management Disagreement, and Share Repurchases

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 man...

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Bibliographic Details
Main Authors: HUANG, Sheng, Thakor, Anjan
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2013
Subjects:
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/3488
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1570485
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Institution: Singapore Management University
Language: English
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Summary: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. 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.