Information disclosure, CEO overconfidence, and share buyback completion rates

An open market share buyback is not a firm commitment, and there is limited evidence on whether firms repurchase the intended shares. Unlike US studies, we use data from unique UK regulatory and disclosure environment that allows to accurately measure the share buyback completion rates. We show that information disclosure and CEO overconfidence are significant determinants of the share buyback completion rate. In addition, we find that large and widely held firms that conduct subsequent buyback programs and have a past buyback completion reputation exhibit higher completion rates. Finally, we assess whether other CEO characteristics affect buyback completion rates and find that firms with senior CEOs who hold external directorships and have a longer tenure as CEO are more likely to complete the buyback programs. In sum, our results suggest there is a clear relationship between information disclosure, CEO overconfidence, and buyback completion rates

Information content of aggregate and individual insider trading

We examine the impact of aggregate insider trading on market returns in the UK. We find that, on aggregate, insiders are contrarians, but their trades are not informative, contrary to previous US evidence. We suggest that this discrepancy is related to the regulatory setting in the UK where insiders have to report their trades within six days. Then we analyse the short-run market reaction to insider trades and find that the information content of insider trading is limited to the period surrounding the announcement dates. We show that market-to-book, company size, stock volatility and market volatility have a significant impact on reporting period returns. In addition, we find that the market reaction is much weaker after controlling M/B and size. Finally, we show that insiders time in high volatile stocks, and following high market volatility

Market sentiment, volatility, timing and the information content of directors’ trades

We examine the impact of aggregate director dealings in the UK. We find that, in aggregate, directors are contrarians, but their trades are not informative, contrary to previous US evidence. We suggest that this discrepancy is related to the regulatory setting in the UK where directors have to report their trades within six days. Aggregate directors’ trading is affected by the market sentiment as they are net purchasers in the bear market and net sellers in the bull market. Since directors’ reporting is faster in the UK, we then analyze the short-run market reaction to director trades. We find that the information content of director dealings is limited to the period surrounding the announcement dates. We show that market-to-book, company size, stock volatility and market volatility have a significant impact on disclosure period returns. In addition, we find that the market reaction is significantly weaker after controlling for market-to-book and size. Finally, we show that directors time their trades in volatile stocks and following high market volatility

Can the information content of share repurchases improve the accuracy of equity premium predictions?

We adjust the dividend–price ratio for share repurchases and investigate whether predictive power can be improved when constructing forecasts of the UK and French equity premia. Regulations in the two largest European stock markets allow us to employ actual repurchase data in our predictive regressions. Hence, we are able to overcome problems associated with markets characterised by less stringent disclosure requirements, where investors might have to rely on proxies for measuring repurchase activity. We find that predictability does not improve either in a statistical or in an economically significant sense once actual share repurchases are considered. Furthermore, we employ a proxy measure of repurchases which can be easily constructed in international markets and demonstrate that its predictive content is not in line with that of the actual repurchase data

Overpayment, Financial Distress, and Investor Horizons

Firms that follow excessive payout policies (over-payers) have significantly higher financial distress risk and lower survival compared to under-payers, consistent with risk-shifting from shareholders to creditors in distressed firms. All else equal, the presence of institutional investors with long-term investment horizons in a firm is associated with overpayment. A transition analysis indicates the existence of a reciprocal relation between overpayment and financial distress, highlighting the feedback effects between overpayment and distress. In addition, over-payers endure smaller future sales and assets growth, and experience a significant future increase in the overall riskiness of their assets, compared to under-payers

The short-term impact of director trading in UK closed-end funds

Most closed-end funds are transparent entities that hold securities that are actively traded in liquid markets. In such a setting, the argument that director transactions mitigate information asymmetry has very limited applicability. Our results provide support for the theory of Barber and Odean [2008. “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” Review of Financial Studies 21: 785–818]: retail investor decision-making is influenced by attention-grabbing events. Director purchases are one such attention-grabbing event and are associated with significant positive price returns – the magnitudes of which are linked to the size of the purchase, the size of the fund, and the investment mandate. Trading volumes increase at the time of the purchase but most of the initial price responses and trading volumes dissipate over the following 15 days

An application of multicriteria decision aid models in the prediction of open market share repurchases

This study presents the first attempt to develop classification models for the prediction of share repurchase announcements using multicriteria decision aid (MCDA) techniques. We use three samples consisting of 434 UK firms, 330 French firms, and 296 German firms, to develop country-specific models. The MCDA techniques that are applied for the development of the models are the UTilités Additives DIScriminantes (UTADIS) and the ELimination and Choice Expressing REality (ELECTRE) TRI. We adopt a 10-fold cross validation approach, a re-sampling technique that allows us to split the datasets in training and validation sub-samples. Thus, at the first stage of the analysis the aim is the development of a model capable of reproducing the classification of the firms considered in the training samples. Once this stage is completed, the model can be used for the classification of new firms not included in the training samples (i.e. validation stage). The results show that both MCDA models achieve quite satisfactory classification accuracies in the validation sample and they outperform both logistic regression and chance predictions. The developed models could provide the basis for a decision tool for various stakeholders such as managers, shareholders, and investment analysts

Can social capital and reputation mitigate political and industry-wide economic risk?

Firms' social capital, captured by corporate social responsibility (CSR), can serve as an operational hedging instrument for firm-specific negative shocks. This paper assess CSR's hedging effectiveness against risks arising from political uncertainty and industry-wide economic shocks. We find that CSR has a significant mitigating effect on stock return volatility making it an effective reputational hedge against political risk such as gubernatorial elections, especially for closely contested elections. However, CSR's hedging is effective only for market risk (stock volatility) and not for cash flow volatility. Meanwhile, a difference-in-difference estimation suggests that CSR is not an effective hedge against risk during industry-wide economic shocks. Finally, CSR's mitigating effect on stock volatility is transient

Can social capital and reputation mitigate political and industry-wide economic risk?

Firms’ social capital, captured by corporate social responsibility (CSR), can serve as an operational hedging instrument for firm-specific negative shocks. This paper assess CSR’s hedging effectiveness against risks arising from political uncertainty and industry-wide economic shocks. We find that CSR has a significant mitigating effect on stock return volatility making it an effective reputational hedge against political risk such as gubernatorial elections, especially for closely contested elections. However, CSR’s hedging is effective only for market risk (stock volatility) and not for cash flow volatility. Meanwhile, a difference-in-difference estimation suggests that CSR is not an effective hedge against risk during industry-wide economic shocks. Finally, CSR’s mitigating effect on stock volatility is transient

Do corporate lawyers matter? Evidence from patents

Patent attorneys are responsible for obtaining patents that bring the highest expected profits for their corporate clients. We investigate the role of patent attorney capability in determining the value of corporate patents. We find that a one standard deviation increase in legal expertise leads to a 0.04% rise in patents’ market valuation and a 3% increase in citations. This finding holds irrespective of the number of patents obtained by patent attorneys to date (process experience). To establish causality, we exploit a novel shock: the opening of new regional patent offices in the US; and changes in a firm’s patent attorney. Overall, we find that capable patent attorneys matter as they increase both the economic and technological value of corporate patents