Investor Heterogeneity, Investor-Management Disagreement, and Share Repurchases

Investor Heterogeneity, Investor-Management Disagreement, and Share Repurchases

Sheng Huang, Anjan Thakor

Series number :

Serial Number: 
367/2013

Date posted :

April 01 2013

Last revised :

June 28 2013
SSRN Share

Keywords

  • stock repurchase • 
  • corporate payout • 
  • agreement • 
  • investor heterogeneity

This paper develops and tests a new theoretical explanation for why a firm conducts open-market and privately-negotiated 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 lower. Second, the level of agreement improves following a repurchase. Third, once the stock price and investor-management agreement are controlled for, dispersion of opinion among investors cannot explain repurchase activity. Our empirical tests provide strong support for these predictions. The results are robust to controls for information asymmetry 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.

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Published in

Published in: 
Publication Title: 
Review of Financial Studies
Description: 
26(10), p2453-2491, 2013

Authors

Real name:
Sheng Huang
Professor
Real name:
Anjan Thakor
Research Member
John M. Olin School of Business, Washington University, St. Louis