Are educational managers credible or overconfident? Evidence from share repurchases in Taiwan

Abstract

This paper examines how managerial educational attainment influences the wealth effects of share repurchases by testing the credible hypothesis versus the overconfidence hypothesis. Based on a set of comprehensive data on top managers' education in Taiwanese listed firms, we find that managerial educational levels but not professional backgrounds in finance, accounting, and law management influence the wealth effects of share repurchases. The magnitude of positive market reactions to a repurchase announcement is smaller (larger) for firms with a higher (no) proportion of top managers with doctoral degrees. Such an inverse relation is especially obvious among firms that are poorly governed and financially constrained. We also detect that repurchasing firms with higher managerial educational levels exhibit poorer long-term post-repurchase stock performance and tend to actually buy back more stock. Our overall findings are supported by the overconfidence hypothesis, positing that highly educated top managers are more subject to overconfidence, which leads to perceived mispricing/overvaluing bias. Thereby, the favorable signal of undervaluation regarding their share repurchase may need to be rectified by the stock market.