Mimicking Behavior in Repurchase Decisions

Abstract

Behavioral biases associated with base rate neglect, anchoring, ambiguity aversion, and robust control may foster an environment in which mimicking may influence decision-making. This study tests for the presence of mimicking behavior in security repurchase decisions. After controlling for variables reflecting financial operating motives and mispricing associated with limits to arbitrage, results show that debt-equity choices in repurchase events are significantly enhanced by the occurrence of recent similar choices made by the firm's competitors. Specifically, the probability of opting to repurchase equity (debt) is positively associated with the size of the firm conducting the largest percentage equity (debt) repurchase in the same industry in the prior year. Moreover, the mimicking activity is observed for smaller-sized firms, but not for larger firms. The findings are consistent with the premise that managers of smaller firms are generally less skilled and experienced, and more prone to be influenced by decision shortcuts such as mimicking the actions of peers.