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RFS Advance Access published online on March 26, 2004
Review of Financial Studies, doi:10.1093/rfs/hhh004
Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved
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The Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved.

Original Articles

Why Do Firms Announce Open-Market Repurchase Programs?

Jacob Oded 1*
1 School of Management, Boston University, 595 Commonwealth Avenue, Boston, MA, 02215

* To whom correspondence should be addressed. E-mail: oded{at}bu.edu.


  Abstract

Empirically, a price increase accompanies the announcement of an open-market stock repurchase program, even though the announcement is not a commitment. In fact, for many announced programs, no shares are ever actually repurchased. This paper explores this puzzle. In the single-firm-type version of the model, the option a firm grants itself by announcing a program does not generate announcement returns. In equilibrium, long-run gains from the informed trading that the option creates are offset by short-run costs from the market's accounting for this adverse selection. Based on this trade-off, I construct a signaling (two-type) model that can deliver announcement returns. In the separating equilibrium, good firms do not incur any cost when they announce programs. Their gains from informed trading in the long run offset the cost of announcement incurred in the short run. Mimicry is costly, because a bad firm's long-run gains from informed trading cannot compensate for the short-run cost of announcing.


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A. M. Buffa and G. Nicodano
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[Abstract] [Full Text] [PDF]


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