Open-Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment

Nobuyuki Isagawa

The Financial Review, 2000, vol. 35, issue 4, 95-108

Abstract: This paper provides a simple explanation of open-market stock repurchases and the stock price behavior surrounding them. There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open-market repurchase announcements reveal information about the managers' private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open-market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open-market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts. Copyright 2000 by MIT Press.

Date: 2000
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