This paper finds that stocks of repurchasers with high sensitivity to investor sentiment are more likely to be mispriced. Thus, such repurchases are followed by superior post-buyback stock performance. This abnormal return associated with sensitivity to sentiment cannot be explained by other undervaluation factors: book-to-market or prior return effects. My results are robust with factor model analysis and controls for contamination effects. I conclude that this sentiment-driven undervaluation may result from the difficulty to value and/or limits to arbitrage rather than investor overreaction.

The outperformance of repurchasing firms with a high book-to-market (B/M) ratio is usually explained by investors’ undervaluation of the firm’s past performance. However, several studies suggest that the underestimation of future intangible value may explain the high return associated with the share repurchase. To better understand the actual information content of repurchases, I decompose the B/M ratio into past tangible information and future intangible information and find that repurchase signals an undervaluation of the intangible return. In addition, I investigate several potential proxies for intangible information—R&D expenses, intangible assets, and future operating performance. My results show that intangible information signals the undervaluation of future operating performance.

We examine how research and development (R&D) incoming spillovers affect long-run firm performance following firms’ R&D increases. We use a stochastic frontier production method to capture R&D incoming spillover effects. Firms reaping more benefits from R&D investment made by other firms experience more improvement in profitability and more favorable long-run stock performance in the post-R&D-increase period. Firms with higher levels of R&D incoming spillovers recruit more key employees from other firms, suggesting that obtaining know-how through hiring is an important source of incoming spillovers. The evidence also shows that firms experiencing more R&D outgoing spillover effects tend to underinvest in R&D.