Managerial Timing Ability and Share Repurchases

Abstract

Using actual repurchases price data, we examine whether firms repurchase their own shares at a discounted price. We also investigate whether the motivation of share repurchases supports the market timing hypothesis. We find that firms repurchase shares at a significantly lower price than the average market price. Especially, firms that repurchase more frequently and take a longer period time to acquire the whole repurchasing shares tend to obtain much lower prices. In addition, the ownership structure such as the stakes of informed traders (domestic and foreign institutional investors) affects the managers'timing ability. Large stakes held by informed investors are more likely to increase the repurchases price. This suggests that informed traders provide private information of firm value and reduce managers' timing ability. Furthermore, we document the relationship between the actual price paid in the repurchase and the long-term performance. We find that if firms repurchase shares at a more discounted price, their abnormal returns are more positive. These results suggest that the managers time the market when they repurchase their own shares. Collectively, we find the supporting evidence that managers have market timing ability in Korea.