Do Managers Use Reference Points? Evidence from Stock Repurchases

Abstract

The extent to which managers use reference points in their corporate decisions remains an open question in the literature. This paper studies the effect of managerial reference points on actual share repurchases. We argue share repurchases are an ideal setting to study managerial reference points because repurchase prices are salient to managers and actual share repurchases typically occur as a sequence of events. We find that the percent change from the prior repurchase price to the current stock price is negatively related to the current level of repurchases. To facilitate a causal interpretation, we find that this relationship disappears when the prior repurchase price is associated with a previous manager. These results are consistent with the idea that managers use past repurchase prices as reference points for current repurchase decisions.