Is Price Support for Overvalued Equity a Motive for Increasing Share Repurchases?

Harrison Liu () and Edward Swanson
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Harrison Liu: UTSA

Working Papers from College of Business, University of Texas at San Antonio

Abstract: Economy-wide, corporate share repurchases increase at market tops, suggesting that price support for overvalued equity could be a motive for repurchasing stock. We investigate this possibility using short selling as a proxy for sophisticated investors’ beliefs about firm valuation. Regressing changes in share repurchases on changes in short interest (and control variables), we find a robust positive association, which is consistent with price support being a significant motive for increasing share repurchases. Examining the subsequent two years, companies with increases in short interest accompanying an increase in repurchases experience a sizable decline in profitability, liquidity, and stock price.

Keywords: overvalued equity; share repurchases (search for similar items in EconPapers)
JEL-codes: M40 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2015-12-08
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