Buying high and selling low: stock repurchases and persistent asymmetric information

Philip Bond and Hongda Zhong

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Share prices generally fall when a firm announces a seasoned equity offering (SEO). A standard explanation is that an SEO communicates negative information to investors. We show that if repeated capital market transactions are possible, this same asymmetry of information between firms and investors implies that some firms also repurchase shares in equilibrium. A subset of these firms directly profit from repurchases, while other firms repurchase in order to improve the terms of a subsequent SEO. The possibility of repurchases reduces both SEOs and investment. Overall, our analysis highlights the importance of analyzing SEOs and repurchases in a unified framework.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2016-06-01
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Citations: View citations in EconPapers (11)

Published in Review of Financial Studies, 1, June, 2016, 29(6), pp. 1409 - 1452. ISSN: 0893-9454

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