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The Credibility of Open Market Share Repurchase Signaling

Published online by Cambridge University Press:  07 June 2012

Ilona Babenko ,
Yuri Tserlukevich  and
Alexander Vedrashko
Ilona Babenko
Affiliation:
ibabenko@asu.edu
Yuri Tserlukevich
Affiliation:
yura@asu.edu, Carey School of Business, Arizona State University, PO Box 873906, Tempe, AZ 85287
Alexander Vedrashko
Affiliation:
awv@sfu.ca, Beedie School of Business, Simon Fraser University, 8888 University Dr, Burnaby, BC V5A 1S6, Canada
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Abstract

Open market share repurchase announcements are commonly associated with equity undervaluation, but their signal about firm value can often be misleading. We conjecture that executives who buy shares of their firm before an announcement add credibility to the undervaluation signal. Consistent with this hypothesis, we find that announcement returns are positively related to past insider purchases, especially for firms that are priced less efficiently. Firms whose insiders bought more shares are also more likely to complete their repurchase plans. Finally, we find that insider purchases predict post-announcement stock returns.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 5 , October 2012 , pp. 1059 - 1088
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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