Mutual Funds Short-termism and Share Repurchase

Abstract

We study whether firms increase share repurchases when their shareholders have short-term preferences. We base our analysis on economic theory that establishes that greater transparency about an agent's action increases the agent's career concerns and short-termism. We use a difference-in-differences design around a regulatory change that increased the transparency of mutual funds' managers portfolio choices (i.e., agent's actions), leading to greater mutual funds' short-termism. We find that firms with greater ownership by mutual funds affected by the regulation increase share repurchases following the regulatory change. Consistent with theory, this effect is stronger when mutual fund managers face high career concerns. We also implement a new simulation model to account for multiple hypotheses testing when reusing natural experiments. Overall, we document one important driver of share repurchases: the short-termism of active mutual funds.