a2 firstname.lastname@example.org, Carey School of Business, Arizona State University, PO Box 873906, Tempe, AZ 85287
a3 email@example.com, Beedie School of Business, Simon Fraser University, 8888 University Dr, Burnaby, BC V5A 1S6, Canada
Open market share repurchase announcements are commonly associated with equity undervaluation, but their signal about firm value can often be misleading. We conjecture that executives who buy shares of their firm before an announcement add credibility to the undervaluation signal. Consistent with this hypothesis, we find that announcement returns are positively related to past insider purchases, especially for firms that are priced less efficiently. Firms whose insiders bought more shares are also more likely to complete their repurchase plans. Finally, we find that insider purchases predict post-announcement stock returns.
This paper has benefited from comments by Paul Brockman (the referee), Nishant Dass, Greg Duffee, Jesse Fried, Simon Gervais, Bruce Grundy, Christopher Hennessy, Dwight Jaffee, Chris Leach, Paul Malatesta (the editor), Roni Michaely, Randall Morck, Christine Parlour, Richard Stanton, Nancy Wallace, Toni Whited, and seminar participants and discussants at the 2007 Financial Management Association meeting in Orlando, 2011 Northern Finance Association meeting in Vancouver, the University of Alberta, University of Colorado, City University of New York, University of Miami, University of Melbourne, University of South Carolina, and Simon Fraser University. We acknowledge financial support from the Hong Kong government and the research assistance of Daniel Deng and Minjeong Kang.