Open Market Stock Repurchase Signaling

This paper presents a signaling model of open market repurchases that simulates the effects of a repurchase on the inside shareholders' utility. If insiders refrain from tendering, then they are exposed to more risk. If insiders are risk averse, then their choice of tthe repurchase proportion will reveal much to the market: 1) firms that repurchase more have higher earnings; 2) riskier firms have higher earnings (Given the repurchase proportion; and 3) firms where insiders have a greater ownership stake have higher earnings, ceteris paribus. I test the model's implications with a sample of over 700 US repurchases and find support for all three hypotheses.