a1 firstname.lastname@example.org, Department of Finance, National Taiwan University, 50, Lane 144, Keelung Rd, Sec 4, Taipei 106, Taiwan;
a2 email@example.com, Department of Finance, University of Illinois at Urbana-Champaign, 340 Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61821;
a3 firstname.lastname@example.org, College of Business Administration, Korea University, 1 5-ga, Anam-dong, Sungbuk-gu, Seoul 136–701, Korea.
Previous studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run performance. The initial reaction provides some support for the mispricing story. However, subsequent earnings-related information shocks suggest that the initial market reaction is incomplete and that long-run performance may be informative. The long-horizon return evidence is most consistent with the mispricing hypothesis and, to some degree, the free cash flow hypothesis. We find little support for the leverage hypothesis.