The Effect of Unsuccessful Past Repurchases on Future Repurchasing Decisions

Management Science (https://doi.org/10.1287/mnsc.2020.3875)

Posted: 15 Mar 2021

See all articles by Geoffrey C. Friesen

Geoffrey C. Friesen

University of Nebraska at Lincoln - Department of Finance

Noel Pavel Jeutang

affiliation not provided to SSRN

Emre Unlu

University of Nebraska at Lincoln

Date Written: March 1, 2021

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.

Keywords: behavior and behavioral decision making, repurchase and dividend payout policy, the effect of past experiences on future decisions, agency costs and risk-taking

Suggested Citation

Friesen, Geoffrey C. and Jeutang, Noel Pavel and Unlu, Emre, The Effect of Unsuccessful Past Repurchases on Future Repurchasing Decisions (March 1, 2021). Management Science (https://doi.org/10.1287/mnsc.2020.3875), Available at SSRN: https://ssrn.com/abstract=3802066

Geoffrey C. Friesen (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Department of Finance
Lincoln, NE 68588-0489
United States
402-472-2334 (Phone)

Noel Pavel Jeutang

affiliation not provided to SSRN

Emre Unlu

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

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