Are Corporate Share Repurchases Used to Support Overvalued Equity?

by Sabrina I. Pacifici on June 24, 2013

Liu, Harrison and Swanson, Edward P., Are Corporate Share Repurchases Used to Support Overvalued Equity? (June 22, 2013). Available at SSRN

“The business press is replete with stories that companies use share repurchases “to pump or support the stock price” (Buffet 2000). If support for overvalued equity has become an important motive for stock repurchases, theory says that arbitrageurs should establish (or increase) short positions in those companies. We use increases in short interest to ex ante identify companies supporting their stock price. Using this measure in a regression model which includes other factors, we find that price support has become a significant motive for changes in share repurchases. Next, we consider ex post evidence and find these companies experience a decline in profitability, liquidity, and stock price. Our evidence shows that companies reduce long-term shareholder value by repurchasing stock to support a high price, and short interest can be used by investors to identify such firms. We also examine if share repurchases change how corporate insiders trade.”

Posted in Economy

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