How Do Institutional Investors Trade When Firms are Buying Back Shares?

Abstract

We study how institutional investors trade when firms buy back shares. We find that aggregate institutional ownership decline following share repurchase announcements. While some institutions sell shares passively to meet the firm demand for the market to clear, the overall institutional sell-off only accounts for 27% of shares bought back contemporaneously by firms. Many firms experience a net inflow of institutional investment. The decrease in institutional shareholding is greater in firms that experience weaker recent stock performance, display more information uncertainty, have higher institutional ownership, and conduct ill-timed/motivated repurchases that are not endorsed by institutions. And most of the sell-off comes from institutions active in trading. Institutional buying is more informative of the future returns than institutional sell-off, especially in firms with greater information asymmetry. But this return predictability decays over time. Our findings have important implications for firms’ cash payout policy and shed light on institutional trading behavior around voluntary corporate events.