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Buying High and Selling Low: Stock Repurchases and Persistent Asymmetric Information

Philip L. Bond^1,2,3,4,5; Hongda Zhong

¹ Washington University in St. Louis · ² University of Notre Dame · ³ Georgia State University · ⁴ University of Washington · ⁵ University of Minnesota

Association, for some very helpful comments. Any errors are our own. Share prices generally fall when a firm announces a seasoned equity offering (SEO). A stan-dard explanation of this fact 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 the repurchase transaction, while other firms repurchase in order to improve the terms of a subsequent SEO. The possibil-ity of repurchases reduces both SEOs and investment. Overall, our analysis highlights the importance of analyzing SEOs and repurchases in a unified framework. Share prices generally fall in response to a firm’s announcement of a seasoned equity offering (SEO).1 The standard explanation for this empirical regularity is that a firm has information that investors lack, and a SEO reveals to investors that the firm’s information is negative (see, in particular, Myers and Majluf (1984)). In equilibrium firms with negative information issue equity, and accept the negative share price response because the SEO

DOI

10.1093/rfs/hhw005

Volume

29 (6)

Pages

1409-1452

Language

en

Export

BibTeX

Sources

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