Does CEO bias escalate repurchase activity?

Suman Banerjee, Mark Humphery-Jenner, Vikram Nanda

Research output: Contribution to journalArticlepeer-review

27 Scopus citations

Abstract

We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.

Original languageEnglish
Pages (from-to)105-126
Number of pages22
JournalJournal of Banking and Finance
Volume93
DOIs
StatePublished - Aug 2018

Keywords

  • Corporate governance
  • Dividend-repurchase substitution
  • Investment-repurchase substitution
  • Overconfidence
  • Repurchases

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