Two essays on stock repurchases
Abstract
My dissertation comprises two chapters. The first chapter examines the information content of actual share repurchase within the context of informed options trading, while the second chapter examines the impact of EPS-motivated share repurchase on stock price crash risk. The first chapter studies the information content of actual share repurchase within the context of informed options trading. I find that pre-repurchase options tradings complement the information conveyed by actual repurchases, and predict higher and more volatile stock return and operating performance. The pre-repurchase use of bullish directional strategy (measured by call options to stock volume ratio) predicts higher abnormal return and operating performance; the pre-repurchase use of volatility strategy (measured by at-the-money options to stock volume ratio) predicts higher abnormal volatility and operating performance volatility. Institutional ownership mitigates the information asymmetry of pre-repurchase options trading. The second chapter investigates whether EPS-motivated share repurchase affects stock price crash risk. This study finds that firms with a higher level of EPS-motivated share repurchase are associated with higher ex-ante (expected) crash risk. Stock liquidity reduces repurchase cost and further increases the expected crash risk. Institutional ownership and analyst coverage discipline managers from conducting EPS-motivated share repurchase and weakens its positive impacts on expected crash risk.
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