The Effect of Unsuccessful Past Repurchases on Future Repurchasing Decisions

Geoffrey C. Friesen, Noel Pavel Jeutang, Emre Unlu

Research output: Contribution to journalArticlepeer-review

Abstract

We find that managers are less likely to repurchase stocks when they lose money on past stock repurchases but find no robust evidence that past gains on repurchases influence future repurchasing activity. This asymmetric sensitivity is strongest for young CEOs and those with the shortest tenure. Also, future repurchases are more sensitive to past repurchase losses for CEOs whose previous lifetime experience with the stock market is unfavorable. The sensitivity of future repurchases to past losses costs firms, on average, about 3.7% per year. When this cost is decomposed into systematic and idiosyncratic components, we find that nearly half (1.8%) comes from mistiming idiosyncratic shocks. Past losses on repurchases have a significant and negative impact on the CEO's future bonus and increase the likelihood that future CEO termination is involuntary. We also find that negative outcomes from past repurchases encourage the subsequent use of dividends. Our findings suggest that outcomes of past repurchases have economically significant consequences through both nonbehavioral (career concerns) and behavioral (snakebite effect) factors.

Original languageEnglish (US)
Pages (from-to)716-739
Number of pages24
JournalManagement Science
Volume68
Issue number1
DOIs
StatePublished - Jan 2022

Keywords

  • Agency costs and risk-taking
  • Behavior and behavioral decision making
  • Repurchase and dividend payout policy
  • The effect of past experiences on future decisions

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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